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, 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'. Only one qualifying account may be held at any one time. An account must be nominated in writing. 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 and 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.
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.
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.
If an individual carries on a trade in their own name (i.e. a sole trader), not using a company or partnership to trade through, they are said to be self-employed.
Each year a sole trader will prepare a set of accounts. In computing this accounting profit, the sole trader could have deducted expenditure that HMRC does not allow for taxation purposes. Consequently, a number of adjustments are required to arrive at the trader’s taxable profit.
To calculate a trader’s taxable profits, it's necessary to start with the profit per the accounts. Certain expenditure that is disallowable for tax purposes is then added back. Receipts in the accounts that are not taxable as trading income are then deducted. Finally, capital allowances must be deducted, which are HMRC’s equivalent of depreciation. 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.
Certain smaller unincorporated businesses (self-employed individuals and partnerships) have the option of calculating their trading profit on a simple cash receipts and payments basis, which is essentially a charge to tax on cashflow.
The option is available to eligible businesses with receipts of up to GBP 150,000, and they must leave the scheme when receipts reach GBP 300,000.
All expenses must be incurred wholly and exclusively for business purposes and exclude the costs of entertaining, the purchase of property, and investments. 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.
This regime has some restrictions, in particular losses can only be carried forward to set against future trade. Certain trades are excluded from the regime. Those running more than one business are only eligible if all receipts from all businesses fall below the threshold. Interest relief is limited to GBP 500. On the whole, this regime makes the administrative burden of starting a business much more straightforward; expenses are taxed on the basis of cashflow, leaving individuals free to concentrate on growing their business and not having to worry about paying tax on earnings before payment.
From 6 April 2017, a trading allowance of GBP 1,000 per year is available to certain individuals. It is not available where on income of 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.
Capital gains are subject to CGT. See Capital gains tax in the Other taxes section for more information.
From 6 April 2023, 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 was reduced to GBP 1,000 from 6 April 2023. Dividends within the GBP 1,000 allowance are not charged to tax. From 6 April 2024, the allowance will reduce to GBP 500.
Property income distributions from a UK REIT are taxed as if they were income from a UK property business.
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.
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.
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 a property business (UK and overseas) are computed on an accruals basis in the same way as those of a trade where the gross income is over GBP 150,000 per year. Fundamentally, profits or losses must be computed in accordance with generally accepted accounting practice (GAAP), capital receipts and expenditure must be excluded, and, in general, expenditure is only deductible if incurred wholly and exclusively for the purposes of the business. A cash basis of calculation applies where receipts are less than GBP 150,000. Although property income is computed similarly to trading income, it 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 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.
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.
Relevant foreign income (RFI)
RFI is a general collective term for income that arises from various sources outside the United Kingdom to a UK resident / non-UK domiciled individual (e.g. profits from a foreign property business, foreign dividends, and foreign interest, but does not include relevant foreign earnings).
The most common types of RFI include:
- Trade profits (the profits of a trade, profession, or vocation carried on wholly outside the United Kingdom).
- Profits of a property business where the property is overseas.
- Interest, such as interest paid on a foreign bank account.
- Dividends from non-UK resident companies, excluding dividends of a capital nature.
- Purchased life annuity payments (i.e. annuity payments made under a foreign purchased life annuity); tax is charged on the full amount of payments.
- Profits from deeply discounted securities.
- Proceeds from the sale of foreign dividend coupons.
- Royalties and other income from intellectual property.
- Profits from a business that involves films or sound recordings; classed as a ’non-trade business’.
Any taxpayer who wishes to claim the remittance basis of taxation should ensure they segregate the various sources of funds to ensure they can clearly demonstrate the derivation of any funds brought into the United Kingdom. Advice should be taken on how to set up bank accounts prior to 6 April of the year UK residence commences. Assets purchased with overseas income and gains may give rise to a tax charge if the assets are brought to the United Kingdom, subject to various exceptions (see The remittance basis of taxation in the Taxes on personal income section for more information).
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.
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 2023/24 tax year, which is the same as the limit for the 2021/22 and 2022/23 tax years. The full amount is permitted to be held in cash, stock and shares, or any combination of the two. The Junior ISA limit for 2023/24 is GBP 9,000, also unchanged from the previous two tax years.