The United Kingdom has a taxation system that generates revenue to fund public services and social programs. This article will provide an overview of how taxation works in the United Kingdom, including double taxation agreements, the main taxes expats need to be aware of, tax breaks, how and when to file a tax return as an expat, and tax exit procedures.
The Taxation System in the United Kingdom
The taxation system in the United Kingdom is administered by Her Majesty’s Revenue and Customs (HMRC). The tax system is divided into two types of taxes: direct and indirect. Direct taxes are levied on individuals and businesses based on their income, while indirect taxes are imposed on goods and services.
Individuals are taxed based on their income, with a progressive tax system based on income bands. The tax rates range from 20% to 45%, with the highest tax rate applicable to those earning more than GBP 150,000 per year.
Businesses are taxed based on their profits, with a corporation tax rate of 19%. However, some industries are subject to higher or lower tax rates, depending on the sector.
Double Taxation Agreements
The United Kingdom has entered into double taxation agreements (DTAs) with over 130 countries, including major trading partners such as the United States, Japan, and Germany. DTAs are agreements between two countries that aim to eliminate double taxation of income earned in both countries. These agreements help to promote cross-border trade and investment and ensure that individuals and businesses are not taxed twice on the same income.
Under DTAs, residents of one country may be eligible for tax benefits, such as reduced withholding tax rates, when receiving income from the other country. Expatriates who are residents of a country that has a DTA with the United Kingdom may be able to take advantage of these benefits.
Main Taxes for Expats in the United Kingdom
As an expat working or doing business in the United Kingdom, there are several taxes that you need to be aware of. These include income tax, national insurance contributions, and value-added tax (VAT).
Income Tax
Expats are subject to income tax on their worldwide income if they are resident in the United Kingdom for tax purposes. The tax rates range from 20% to 45%, with the highest tax rate applicable to those earning more than GBP 150,000 per year.
Expats may be eligible for certain tax reliefs and allowances, such as the personal allowance, which can help reduce their tax liability.
National Insurance Contributions
Expats who are employed in the United Kingdom are required to make national insurance contributions (NICs), which provide access to certain state benefits, such as healthcare and retirement benefits. The contribution rates vary depending on income, but are typically around 12%.
Value-Added Tax (VAT)
VAT is a tax on goods and services that is levied at a rate of 20%. Certain goods and services, such as food, medicine, and education, are exempt from VAT.
Expats who are providing services in the United Kingdom may be subject to VAT if their annual revenue exceeds a certain threshold. The current threshold is GBP 85,000 per year.
Special Tax Breaks for Expats
Expats who are working or doing business in the United Kingdom may be eligible for certain tax breaks. These include:
Personal Allowance
Expats who are resident in the United Kingdom are entitled to a personal allowance, which is currently GBP 12,570. This can help reduce their income tax liability.
Double Taxation Relief
Expats who are resident in the United Kingdom may be eligible for double taxation relief, which can help reduce their tax liability on income earned abroad.
Entrepreneur’s Relief
Entrepreneur’s Relief is a tax relief that provides a reduced rate of capital gains tax (10%) on the sale of a qualifying business or business assets. Expats who are selling a business or business assets in the United Kingdom may be eligible for this relief.
Filing Tax Returns
Expats in the United Kingdom are required to file a tax return annually, regardless of whether they are liable for tax. The deadline for filing the tax return is January 31st of the following year.
Expats can file their tax return online or by mail. They will need to provide their personal information, income earned in the United Kingdom and abroad, and any applicable tax reliefs or allowances.
Employers are responsible for deducting income tax and national insurance contributions from their employees’ salaries and remitting them to HMRC. Expats who are self-employed or running a business in the United Kingdom are responsible for paying their own taxes.
Tax Exit Procedures
Expats who are leaving the United Kingdom to move abroad are required to complete tax exit procedures. This involves notifying HMRC of their departure and filing a final tax return.
Expats who are leaving the United Kingdom may also be eligible for certain tax refunds, such as a refund of any overpaid tax or a refund of any tax paid on income earned after leaving the United Kingdom.
Expats should consult with a tax professional to ensure that they are in compliance with all tax requirements before leaving the United Kingdom.
In conclusion, the taxation system in the United Kingdom is relatively complex, with direct and indirect taxes levied on individuals and businesses based on their income and profits. Expats who are working or doing business in the United Kingdom should be aware of their tax obligations and take advantage of any tax breaks or incentives that they may be eligible for. Filing tax returns and completing tax exit procedures are important steps to ensure compliance with the law and avoid any potential legal issues. Expats should consult with a tax professional to ensure that they are meeting all tax requirements and taking advantage of any available tax benefits.