If an individual is resident and domiciled in the United Kingdom, they will be taxed on their worldwide income and capital gains.
If an individual is not UK resident, they will usually be taxed on their UK-source income, but will not generally be taxed on capital gains, other than UK residential property or carried interest, even if the asset is located in the United Kingdom. Gains in respect of UK residential property owned by non-residents are subject to UK CGT at 28%. The recent Finance Bill contained provisions that will extend the tax charge to all UK property disposed of by non-UK residents and also shares in 'property-rich' non-UK companies. These changes will be introduced from April 2019.
In addition, where the asset is used for business purposes in the United Kingdom through a UK branch or agency, any gains are also subject to UK CGT. There are also special rules for income and capital gains tax where a person has become non-UK resident but returns to the United Kingdom within, broadly, five years.
If an individual is resident but not domiciled (and not deemed domiciled) in the United Kingdom, they can elect for the remittance basis of taxation, in which case their non-UK investment income and capital gains are only taxed if they are remitted to the United Kingdom. This is an area of the UK tax regime that has been considerably modified over the last few years and is covered in more detail below.
Personal income tax rates
Income tax is charged at graduated rates, with higher rates of income tax applying to higher bands of income. Tax is charged on total income (from all earned and investment sources) less certain deductions and allowances. The main allowance is the personal allowance, which is GBP 11,850 in 2018/19, rising to GBP 12,500 in 2019/20. Most individuals can claim a personal allowance, unless they are claiming the remittance basis (see below) or their income is over GBP 100,000. The net amount after allowances is usually referred to as an individual's taxable income. The graduated rates of income tax vary slightly depending on whether the income is from earnings or investments.
Income tax bands and rates are as follows:
|Tax rate band
||Income 2018/19 (GBP)
||Income 2019/20 (GBP)
|Starting rate for savings: 0% *
||0 to 5,000
||0 to 5,000
|Basic rate: 20%
||0 to 34,500
||0 to 37,500
|Higher rate: 40%
||34,501 to 150,000
||37,501 to 150,000
|Additional rate: 45%
* The 0% starting rate is for savings income only. If non-savings income (which takes up the first ‘slice’ of income) is above this limit, then the 0% starting rate will not apply.
Note that dividends are always treated as the top slice of income and will be taxed at an individual's highest marginal tax rate (see Dividend income in the Income determination section for rates specifically applicable to dividends). ‘Savings income’ is the next slice down, and other income (such as earnings) will be the lowest slice. The most common form of ‘savings income’ is interest, but certain other forms of income are also included.
A dividend allowance applies to the first GBP 2,000 of an individual’s dividend income in 2018/19. The allowance operates as a 0% tax rate.
The dividend allowance does not reduce total income for tax purposes. Dividend income that is within the ‘allowance’ still counts towards an individual’s basic and higher rate limits.
The remittance basis of taxation
The rules relating to non-doms have changed from 6 April 2017, with further changes introduced from 6 April 2018 as stated in the Significant developments section, which contains a summary of the changes.
Domicile status is important because individuals who are domiciled outside the United Kingdom can elect to pay tax on overseas investment income, capital gains, and certain offshore earnings only to the extent that these are remitted to the United Kingdom. This is called the 'remittance basis' of taxation. Overseas income and gains not remitted to the United Kingdom will not be subject to UK tax (advice needs to be taken if overseas funds are used as collateral for loans brought to the United Kingdom or in connection with UK residential property).
UK resident individuals eligible for the remittance basis of taxation include the following:
- Those who are UK resident but not domiciled (or deemed domiciled) in the United Kingdom, who pay (if necessary) the remittance basis charge annual payment (see below).
- Non-UK domiciled individuals who have unremitted non-UK income and gains on non-UK assets that are less than GBP 2,000. The remittance basis applies automatically and no claim is required.
- Non-UK domiciled individuals who have been UK resident for not more than six out of the preceding nine years, or are under 18 years of age, or those who have no UK sources of income and gains and do not remit any foreign income or gains. The remittance basis applies automatically.
If this election is made (category 1 above), the individual will give up any entitlement to the tax-free personal allowance (see the Deductions section) and CGT annual exemption (see the Other taxes section). In addition, an individual who wishes to claim the remittance basis of taxation but has been resident in the United Kingdom in at least seven out of the previous nine years and is over 18 years of age will have to pay an additional tax charge of GBP 30,000 each tax year to enable them to use the remittance basis of taxation. This is referred to as the remittance basis charge (RBC).
The RBC is GBP 60,000 for those non-domiciled individuals who have been resident in the United Kingdom for 12 out of the past 14 years.
Eligible individuals in categories 2 and 3 above will be taxed on the remittance basis but will not lose their allowances and will not have to pay the RBC.
There are statutory rules for determining how a transfer from a 'mixed' fund (i.e. an account comprising of a mixture of capital/foreign income/gains and/or from different tax years) is treated.
A tax charge may also arise if assets that were purchased with foreign income and gains are brought to the United Kingdom. There are specific exemptions for personal effects and assets costing less than GBP 1,000 and for assets brought into the United Kingdom for repair, for less than 275 days, or for public display.
Business investment relief is available for UK resident, non-UK domiciled individuals. It provides an opportunity for non-UK domiciled individuals to make non-taxable remittances to fund enterprise in the United Kingdom. Unlimited investment in trading and commercial property companies via shares, securities, or loans are permitted under the rules. This makes the United Kingdom a favourable place for non-doms to both start and to continue to build business interests, although restricted to a corporate environment. Care is needed before any money is remitted for this purpose, as there are strict rules to adhere to in order to be eligible for the relief.
Alternative minimum tax
There is no alternative minimum tax in the United Kingdom.
Taxation of children
Children are taxable in their own right unless their income derives from gifts from a parent, and then any amount in excess of GBP 100 is taxed on the parent. A child tax credit (CTC) (if the parents are eligible) is normally payable to the main carer and is gradually withdrawn based on a formula according to the recipient’s (and their partner’s) level of income. CTCs are non-taxable and are neither related to nor deducted from the claimant's income tax liability. CTCs are not 'tax credits' in the conventional sense, but social security benefits.
Local income taxes
There are no local taxes on income in the United Kingdom.