What income is taxable?
Added: (Sun Jan 28 2018)
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Residency status determines what a person must include as 'income' when determining his or her tax band. Non-UK residents are only taxed on income earned within the UK, including capital gains, rental income and dividends. Individuals who are residents of the UK for tax purposes are taxed on their worldwide income, including foreign investments and savings interest, rental income on overseas properties and income from foreign pensions or a UK pension for those retiring in the UK.
Income taxes in the UK
In the UK, many of the various taxes for which an individual will be liable – with the very notable exception of VAT – will in some way be keyed to your income taxes. The basic formula for taxes is to sum your personal income and benefits, subtract your personal allowance, and then pay the appropriate rate on the difference. For the 2016/17 tax year, all individuals are allowed a personal allowance of GBP 11,000, making income below this level tax exempt. UK income tax rates are stepped depending on your income. These steps, or 'bands', are also used to determine other tax rates, such as capital gains.
UK tax on rental income
Net proceeds from renting property in the UK are included as income for both residents and non-residents. Special rules apply for renting out a single room, renting out your property for holiday purposes, and if you are an overseas landlord.
Net proceeds are determined as gross rental receipts minus allowable expenses. The UK disallows most capital expenses against rent, including the cost of buying or improving the property, depreciation and mortgage interest on your home(s).
Property taxes in the UK
According to OECD statistics, the UK has the highest property taxes in the developed world. UK property tax revenue accounts for more than one-tenth of total taxes (around 12 percent) from the use, transfer and ownership of property in the UK. This represents the highest revenue derived from property taxes of all OECD countries, compared to less than 4 percent in countries such as Austria, Finland, Germany and the Netherlands.
There are two forms of property tax in the UK. When you buy a property in the UK over a certain threshold you must pay a Stamp Duty Land Tax (SDLT). SDLT only applies to residential properties valued more than GBP 125,000, or to non-residential land and properties bought for more than GBP 150,000. It is payable in England, Wales and Northern Ireland, while in Scotland a Land and Buildings Transaction Tax applies instead.
Like income tax, the SDLT is a stepped-rate tax. Here is a UK tax calculator for the SDLT. You must send your SDLT return to the HMRC and pay the tax within 30 days of completing the sale. There are certain tax exemptions that allow to lower your UK property tax, for example, if you buy multiple properties; see conditions here.
The other form of UK property tax is the Council Tax. This is a local municipality tax that is stepped or banded like income tax. Each local municipality assesses the properties in their jurisdiction annually and assign the tax based on the assessed value. A number of conditions affect the rate of applicable council tax, explained here.
Capital gains tax in the UK
Capital gains tax (CGT) is charged on the difference between the sale price and purchase price on 'chargeable assets'. Capital gains tax (CGT) is payable on the profitable sale of a range of assets, whether you sell a business, shares, an heirloom or a property.
Chargeable assets include:
• Personal possessions valued at GBP 6,000 or more (excluding vehicles)
• Real estate that is not your main home
• A main home if you let it out or used it for business or it’s very large
• Shares that are not in an ISA or PEP
• Business assets.
CGT must be paid on all UK assets, whether or not you are a resident. However, if you are a resident, you may owe CGT even on your non UK asset dispositions.
CGT is added to your other taxable income. The sum of all your income from various sources determines which tax band you are in for the current tax year:
• If you total taxable income is less than GBP 43,000 – that is, you are still in the 'basic band' – your capital gains rate is 10 percent on most chargeable assets and 18 percent on your home.
• If your capital gains takes you into the next highest band then, you pay 20 percent on most of your chargeable assets and 28 percent on your home – but only on a portion of your capital gains that pushes your taxable income into the next band. For example, if your taxable income from employment is GBP 35,000 and you sold your UK home for a gain of GBP 10,000, your CGT tax will be 18 percent on GBP 8,000 and 28 percent on the last GBP 2,000 since that is the amount pushed into the next band by your capital gain.
See the government's website for a list of capital gains tax rates in the UK.
UK inheritance tax
Inheritance tax in the UK is a one-off payment paid on the value of a deceased’s estate if above a set threshold, currently GBP 325,000. Any value higher than the threshold is taxed at 40 percent. If you give more than 10 percent of your inheritance to charity, however, the rate is reduced to 36 percent.
There are other ways to reduce your UK inheritance tax liability. If you are married or in a civil partnership, your partner can inherit your entire estate without facing an UK inheritance tax bill. Should you wish to pass on your assets before you die, you can gift them to your partner.
Find detailed information in our guide to UK inheritance tax, law and wills.
Car and road tax in the UK
If you drive in the UK you will need to pay car and road tax, including when you register your car with the DVLA(Driver and vehicle licensing agency). The amount varies per vehicle type, with car and road tax in the UK based on factors such as the size of the engine, type of fuel used and CO2 emissions. A table of UK car and road tax rates can be found here, where you’ll see payment rates for alternative fuel cars (TC59) are GBP 10 lower than for petrol (TC48) and diesel cars (TC49). P
You can pay your car and road tax on the government website. New tax rules on emissions tax, initiated on 1 April 2017, mean those buying a car in the UK will typically now pay more car and road tax in the UK, ranging from GBP 130 up to GBP 450 per year. Electric cars are exempt from certain UK car taxes based on their low-emission output. The British use the metric system (km/h); read more on UK road rules.