United Kingdom

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 in respect of UK property/'property-rich' companies or carried interest, even if the asset is located in the United Kingdom. Gains in respect of UK residential property owned by non-residents have been subject to UK CGT at 28% for a number of years, and the tax charge has been extended to all UK property disposed of by non-UK residents and also shares in 'property-rich' non-UK companies 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 12,570 in 2021/22. Most individuals can claim a personal allowance, unless they are claiming the remittance basis (see below) or their income is over GBP 125,140. 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:

* 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 2021/22. 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

From 6 April 2017, where a non-UK domiciled individual ('non-dom') has been resident in the United Kingdom for more than 15 of the last 20 tax years, they will be deemed domiciled in the United Kingdom for all taxes. This means they will no longer be able to claim the remittance basis from this point onwards. Individuals who have previously claimed non-dom status will, therefore, pay tax on their worldwide income and gains, as well as be subject to UK inheritance tax (IHT) on their worldwide assets, in the same way as UK domiciled individuals. It also means a child who lived with non-domiciled parents in the United Kingdom can be deemed domiciled by adulthood.

Individuals born in the United Kingdom with a UK domicile of origin who have acquired a domicile of choice elsewhere, but who return to the United Kingdom (‘formerly domiciled residents’), have a one-year grace period on resuming UK residence before their worldwide assets become subject to IHT, but they will be subject to income and capital gains tax on the arising basis for any tax year they are UK resident.

Any trusts set up by formerly domiciled residents whilst they were non-UK domiciled are now within the scope of UK IHT. In addition, formerly domiciled residents will not be able to benefit from the trust protections or asset rebasing as set out below.

HMRC are increasingly enquiring into a claim by individuals to be non-UK domiciled, especially where the individual has been resident in the United Kingdom for many years and/or cannot demonstrate the circumstances in which they will leave the United Kingdom. The individual must be able to provide strong evidence to HMRC to demonstrate their intention to leave the United Kingdom and provide evidence to show in what circumstances they will leave the United Kingdom to remain non-UK domiciled.

Domicile status is important because individuals who are domiciled outside the United Kingdom can elect to pay tax on overseas investment income, non-UK 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:

1. 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). A claim is required in order to benefit from the remittance basis.
2. Non-UK domiciled individuals who have unremitted non-UK income and gains on non-UK assets that are less than GBP 2,000 in the year. The remittance basis applies automatically and no claim is required.
3. Non-UK domiciled individuals who have been UK resident for less than seven out of the preceding nine years, or are under 18 years of age, and 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.

A tax charge will arise if foreign income and gains are remitted to the United Kingdom. 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 overseas 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, under the current legislation, 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 under 18 are taxable in their own right unless their income derives from gifts from a parent, where the amount is in excess of GBP 100 it 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.