As per the personal income taxation rules in the UK, it can be seen that in the case where an individual is resident and domiciled in the UK, they are taxed on the income earned across the globe, as well as capital gains. In the case where the individual is not classified as a UK resident, they are taxed on their UK-sourced income only. However, the tax is not levied on capital gains in most cases. If the asset is used for business purposes, then the gains are subject to capital gains tax.
Similarly, if an individual is a resident in the UK, but is not domiciled, they are allowed to elect for the remittance basis of taxation.
Personal Income Tax Rates
Generally, personal income tax is charged at a progressive rate. This implies that a higher tax rate is applied on higher bands of income. Tax is generally charged on total income after accounting for deductions and allowances. The main allowance that is deducted is the personal allowance, which amounts to GBP 12,570. Mostly individuals are allowed to claim either a personal allowance, or use the remittance basis (where their income is over GBP 125,140). The net amount that remains after subtracting all the relevant allowances is referred to taxable income.
The personal income tax rates that are applied are summarized as follows:
- Tax Rate Band for starting rate for savings @ 0%: Applicable for an income threshold between 0 GBP and 5000 GBP.
- Tax Rate Band applied on a basic rate @ 20%: Applicable for an income threshold between 0 GBP and 37,700 GBP.
- Tax Rate Band applied at a higher rate @ 40%: Applicable for an income threshold between 37,701 GBP and 150,000 GBP.
- Tax Rate band applied at an additional rate @ 45%: Applicable for an income greater than GBP 150,000.
Remittance Basis of Taxation
The remittance basis of taxation tends to be an important part, primarily on the grounds of identifying the tax liability on individuals that are either residents, but not domiciled, or non-residents and non-domiciled. The UK resident individuals that are eligible for remittance basis of taxation are subject to a remittance basis charge (RBC). For individuals who have been residing in the UK for a period of 7 out of 9 years are supposed to pay an additional charge in the form of RBC amounting to a sum of GBP 30,000. Similarly, this is set at an amount of GBP 60,000 for non-domiciled individuals who have been present in the UK for 12 out of 14 years.
However, it must be noted that a tax charge is going to arise in the case where foreign incomes and gains are remitted in the UK.
There are no local personal income taxes in UK.
Corporate Income Taxation in the UK
For resident companies of the UK, tax is levied on worldwide profits. There are several non-resident companies that are subject to UK corporation tax on their worldwide income. On the other hand, non-resident companies are only taxed on the income that has been sourced from within the UK. In other words, they are only supposed to pay tax on the income that is attributable to the UK.
General Corporation Income Tax Rates for Resident Companies in UK
The normal rate of corporate taxation in UK is levied at a rate of 19%.
In the case where taxable profits are attributed to patent usage, a lower effective tax rate is applied. The applicable rate, in this case is 10%. However, for this to hold, the profits derived should be from sale of a product that includes patent.
Special Corporation Tax Regimes
There are some special corporate tax regimes that are set in the UK in order to foster growth in high potential sectors. These tax regimes are given below:
- Oil and Gas Company Regime: Profits that mainly arise from oil or gas extractions and related fields, as well as oil and gas rights are subject to taxation in the United Kingdom in accordance with the applicable rates of 30% (at a full rate) and 19% (for small profits). They are also provided 100% capital allowances on almost all capital expenditure.
- Life Insurance Company Regime: Life Insurance Companies are also taxed under a special regime that facilitates them to induce a lower tax rate as compared to other corporate taxes.
- Tonnage Tax Regime: Companies that are eligible for corporation tax and operate qualifying ships that are located and functioning in the United Kingdom apply tonnage tax in place of corporation tax. This is an alternate method of calculation of corporate income taxes in regard to net tonnage of operated ships.
- Banking Sector: A supplementary tax is also levied to companies in the banking sector at a rate of 8% on profits over and above an amount of GBP 25 million.
General Corporation Income Tax Rates for Non-Resident Companies in UK
Non-resident companies in the UK are supposed to pay tax on the trading profits of a UK Permanent Establishment. Even if there are trading profits that are attributable to a UK PE, the income is supposed to be taxed under the UK Corporation Tax.
As far as UK-sourced income received by a non-resident company is concerned, it can be seen that it is taxed at a basic rate of 20%.
Diverted Profit Tax (DPT)
Diverted Profits Tax is defined as UK’s response towards a shifting tax environment as highlighted in the reports. It is different from other corporate taxes. It is levied at a rate of 25% on diverted profits. However, this rate is set to increase to 31% by April 2023. DPT is applicable in cases where corporation groups create a tax benefit by using transactions or entities that do not fall under the criteria or where foreign companies have structured their UK activities to avoid a UK PE that involves an effective tax mismatch outcome.
Other than the corporate taxes mentioned above, there are no local or provincial taxes applicable on income.