How Taxes work in the UK
Understand how the Tax System in London and the UK affects you
Moving to a new country can be an exciting adventure, but it also comes with its own set of challenges. One of the biggest concerns for many expats is understanding the tax system in their new home. For those moving to London, the tax system can be particularly complex, so it's important to take the time to understand how it works.
In the UK, taxes are an essential source of revenue for the government and are used to fund public services like healthcare, education, and social welfare.
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Understand the UK Tax System
The UK tax system is based on a self-assessment model, which means that individuals are responsible for calculating their own tax liability and submitting a tax return to HM Revenue and Customs (HMRC). The tax year in the UK runs from April 6th to April 5th of the following year. As an expat, you'll be required to pay taxes on your income in the UK, including any income earned from employment, self-employment, or investments.
The two main types of taxes in the UK are income tax and national insurance contributions.
Tax Residency Status
One of the first things you'll need to determine is your tax residency status. This will determine whether you're subject to UK taxes on your worldwide income or just your income earned in the UK.
The UK has a progressive income tax system, which means that the more you earn, the higher the percentage of tax you'll pay. There are currently four tax bands in the UK, ranging from 20% to 45%. The tax-free personal allowance for the 2022/2023 tax year is £12,570, which means that you won't pay any tax on the first £12,570 of your income. For income earned over this amount, you'll pay tax at the relevant tax rate.
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National Insurance Contributions
In addition to income tax, you'll also be required to pay National Insurance (NI) contributions if you earn over a certain amount. National insurance contributions (NICs) are paid by employees and employers and go towards funding the UK’s social security system. If you’re employed in the UK, you’ll pay Class 1 NICs, which are calculated as a percentage of your earnings.
If you’re Self-Employed
If you’re self-employed in the UK, you’ll pay a different type of national insurance contribution called Class 2 NICs. You’ll also pay Class 4 NICs on your profits, which are calculated as a percentage of your earnings.
Value Added Tax (VAT)
Value Added Tax (VAT) is a consumption tax that's added to most goods and services in the UK. The standard rate of VAT is currently 20%, although there are also reduced rates of 5% and 0% for certain items such as food and children's clothes.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax on the profits made from the sale of assets such as property or investments. As an expat, you'll be subject to CGT on any gains made from the sale of UK assets.
Inheritance Tax (IHT) is a tax on the estate of someone who has passed away. If you're an expat with assets in the UK, you may be subject to IHT on those assets
How to pay Taxes in the UK
If you’re employed in the UK, your employer will deduct income tax and national insurance contributions from your pay and pay them to HM Revenue and Customs (HMRC) on your behalf. If you’re self-employed, you’ll need to complete a self-assessment tax return each year and pay any taxes you owe to HMRC.
As an expat, you may also be eligible for certain tax reliefs and exemptions.