United Kingdom

Employment income

All employees and office holders (including directors) are taxed as employees. General earnings include all salary, bonuses, commissions, overseas allowances, housing allowances, and most other items that could be seen as deriving from the employment. There are specific rules for taxing items that are not provided in cash, such as living accommodation and cars.

Since 6 April 2017, the tax and employer NIC advantages of salary sacrifice (and cash alternative) arrangements have been removed so that the salary sacrificed is subject to (broadly) the same tax as cash income. There are exemptions, including arrangements relating to registered pension schemes, childcare vouchers (now closed to new entrants), Cycle to Work, and ultra-low emission cars.

Overseas workday relief (OWR) / Special Mixed Fund (SMF) Rules

Provided certain conditions are met, non-domiciled employees coming to work in the United Kingdom, and who are claiming the remittance basis, are entitled to OWR for three tax years (i.e. the year of arrival and the two following tax years).

The SMF Rules provide a simplified process for identifying remittances by those claiming OWR. If the SMF Rules do not apply, then strict legislative rules need to be followed on a transaction-by-transaction basis. 

To benefit from the SMF Rules, the individual must have their employment income either partially or fully paid into a 'qualifying account'. No other sources of income outside of employment income and any interest that accrues in the account is permitted to be paid into the account. Only one qualifying account may be held at any one time. An account must be nominated to HMRC in writing by 31 January following the end of the tax year in which the relief is claimed. A number of conditions have to be met in order for the account to be a qualifying account, including that it must be an overseas account, have a balance of no more than GBP 10 on the day that the first deposit of 'qualifying earnings' from the employment is paid into the account, and while the account can be held in joint names, only one of the account holders can contribute to it.

Where the conditions set out in the SMF Rules are met, then the individual does not have to apply the normal mixed fund rules to each transaction from their qualifying account to determine what has been remitted to the United Kingdom. Instead, they may treat all the remittances made from that account during the year as if they were a single remittance made at the end of the tax year.

Please note that as per the Spring Budget 2024, proposals have been made for the current tax regime for non-UK domiciled individuals to be abolished from 6 April 2025. At the point of writing, we understand that OWR will still be available for eligible employees in their first three years of UK tax residence, as long as they are eligible for the FIG regime. This relief applies to income from employment duties carried out overseas. Please see the Significant developments section for further information regarding expected changes to the taxation of non-UK domiciled individuals.

Equity compensation

The value of shares given to a director or employee or obtained under a share option plan, as a reward for services, is, in principle, taxable to the employee/director. In practice, the tax treatment and timing of any tax charge will depend on whether shares are received under a tax favoured or non-tax favoured share plan and/or whether there are special features, such as restrictions or conversion rights, affecting the value of the shares.

Business income

If an individual carries on a trade in their own name (i.e. a sole trader), not using a company to trade through, they are considered to be self-employed. Members of a partnership are also considered to be self-employed.

Whereas, previously, certain smaller unincorporated businesses (self-employed individuals and partnerships) had the option of calculating their trading profit on a simple cash receipts and payments basis (rather than on an accruals basis), this is now the default method for calculating trading profits for many income taxpayers carrying on a trade (although certain trades are excluded, including trades carried on by a UK LLP or by a partnership with a corporate partner).

All expenses must be incurred wholly and exclusively for business purposes and exclude the costs of entertaining, the purchase of property, and investments. 

In computing their trading profit, the sole trader could have deducted expenditure that HMRC does not allow for taxation purposes (such as those above). Consequently, a number of adjustments may be required to arrive at the trader’s taxable profit, e.g. certain expenditure that is disallowable for tax purposes are added back, receipts that are not taxable as trading income are deducted, capital allowances (which are HMRC’s equivalent of depreciation) can be deducted. 

A trading allowance of GBP 1,000 per year is available to certain individuals. It is not available to partners or close company participators. Where total receipts are not more than GBP 1,000, the allowance is given automatically, no tax is payable, and no income needs to be declared. An election can be made for relief not to apply at all, or for partial relief to apply where receipts exceed GBP 1,000 so that the allowance rather than the actual expenses incurred is deducted from gross receipts.

This gives the ‘tax adjusted profit’, which is acceptable to HMRC.

Taxable profit is then taxed at income tax rates in the tax year in which the accounting year ends. Specialist advice should be sought for further detail.

For more detail on allowable deductions, see Business deductions in the Deductions section.

It is still possible to calculate profits using the more traditional accruals basis by opting out of using the cash basis. This may be required by banks and other lenders. 

The measures come alongside the introduction of simplified expenses for vehicles, use of home for business purposes, and use of premises for home and business. These measures are optional, and the taxpayer can claim a proportion.

Capital gains

Capital gains are subject to CGT. See Capital gains tax in the Other taxes section for more information.

Dividend income

The dividend basic rate, higher rate, and additional rate are 8.75%, 33.75%, and 39.35%, respectively. 

Any individual who has dividend income can benefit from the dividend allowance, which is GBP 500 as of 6 April 2024. Dividends within the GBP 500 allowance are not charged to tax.

Property income distributions from a UK REIT are taxed as if they were income from a UK property business.

Interest income

There is a starting rate of 0% applicable on savings income (subject to an overall income limit of GBP 5,000), and the most common form of ‘savings income’ is interest.

Rental income

The taxation of income arising from property will depend on the location of the property and the residence and domicile status of the individual. If the individual is UK resident and UK domiciled or deemed domiciled, worldwide property income will be taxable in the tax year it arises (in a similar way to investment income). If the individual is UK resident but not domiciled in the United Kingdom, income from overseas properties will only be taxable in the United Kingdom if the income is remitted to the United Kingdom, provided the individual has claimed the remittance basis of taxation or the automatic remittance basis applies. If the overseas property is disposed of by a UK resident non-UK domiciled individual, UK CGT will only be due if the proceeds are remitted to the United Kingdom if the remittance basis has been claimed. It should be noted that there are proposals to abolish the non-UK domicile regime from 6 April 2025 and replace it with a residence-based regime (see the Significant developments section above for more details).

A person's ‘UK property business’ consists of every business that generates income from land in the United Kingdom and any other transaction that an individual enters into for that purpose. An ‘overseas property business’ is similarly defined, but by reference to land outside the United Kingdom.

The profits (or losses) of an unincorporated property business (UK and overseas) are generally computed on the cash basis, meaning income and expenses are recognised in the period they are received/paid. There are a few exceptions to this, the main one being where gross income exceeds GBP 150,000 per year, in which case the accruals basis must be used. Irrespective of whether the accruals or cash basis is used, property income retains its nature as investment income as opposed to earnings and does not count as relevant earnings for pension contribution purposes.

From 6 April 2017, the amount of tax relief available on mortgage interest in respect of residential let properties has been tapered down. Tax relief is now allowed at the basic (20%) rate only. Since April 2016, the old 10% ‘wear and tear allowance’ has been replaced with a relief based on the cost actually incurred in replacing furnishings.

Rent-a-room relief is available where gross annual receipts from letting furnished accommodation in the main or only home are exempt from tax up to a maximum of GBP 7,500 (provided no other taxable income is derived from a trade, letting, or arrangement from which the rent-a-room receipts are derived). The limit reduces to GBP 3,750 if someone else receives income from letting accommodation in the same property, such as the joint owner. The limit is the same even if the accommodation is let for less than 12 months.

If the gross receipts exceed the rent-a room limit, the individual can pay tax on the net receipts after deduction of expenses. Alternatively, the individual can elect to pay tax on the amount by which the gross receipts exceed the limit without relief for the actual expenses incurred.

A property allowance of GBP 1,000 per year is available to certain individuals. It is not available where rent-a-room relief could be claimed. Where total receipts are not more than GBP 1,000, the allowance is given automatically, no tax is payable, and no income needs to be declared. An election can be made for relief not to apply at all, or for partial relief to apply where receipts exceed GBP 1,000 so that the allowance rather than the actual expenses incurred is deducted from gross receipts.

Intellectual property

Royalties and other income from 'intellectual property' are chargeable to income tax. The full amount of such income arising in the tax year is chargeable less expenses incurred wholly and exclusively for the purpose of generating income.

Non-resident investment income

Tax on UK investment income (other than profits from a UK property business) received by someone not resident in the United Kingdom is often reduced or eliminated by a tax treaty. Even where no treaty relief is available, the UK tax liability of a non-resident on certain 'excluded income' cannot exceed the tax (if any) withheld or deducted at source or treated as deducted at source. 'Excluded income' includes dividends from UK companies, interest income, and certain social security benefits.

Exempt income

Very little income is exempt from UK tax; however, some examples of exempt income include:

• lottery and betting winnings
• most gifts
• income from individual savings accounts (ISAs), and
• the first GBP 30,000 of some employment termination payments.

Individual savings accounts (ISAs)

The overall annual subscription limit is GBP 20,000 for the 2024/25 tax year, this limit has remained the same since 2017/18. 

There are four types of ISA:

• Cash ISA.
• Stock and shares ISA.
• Innovative finance ISA.
• Lifetime ISA.

The GBP 20,000 limit is shared between subscriptions to all types of ISA in each tax year. Generally, subscriptions can be made to multiple ISAs in any combination, provided the amount invested is within the overall annual limit. The only exception to this is the Lifetime ISA, which has an annual limit of GBP 4,000 per year. The Lifetime ISA limit counts towards the GBP 20,000 allowance. The Junior ISA limit for 2024/25 is GBP 9,000, which has not changed since 2020/21.

The exemption applies to both income tax and capital gains tax, i.e. both interest and dividends earned from ISAs as well as any gains arising on stocks and shares held in an ISA are exempt from UK tax.