UK Tax overview
In the United Kingdom, there exist several types of taxes that pertain to individuals and companies. In the following section, we will provide a brief overview of some commonly encountered ones:
Income tax
The amount of Income Tax you pay in a tax year depends on several factors. Firstly, it is determined by the extent to which your income exceeds the Personal Allowance, which represents the portion of income exempt from taxation. Moreover, the specific tax band within which your income falls also influences the amount of tax owed. It is worth noting that certain types of income are exempt from taxation.
For the tax year 2026/27, the standard Personal Allowance is set at £12,570. The tax rates range from 20% to 45%, depending on the applicable tax band for your income. Specifically, the rates are as follows:
Basic Rate: 20% tax on earnings between £12,571 and £50,270.
Higher Rate: 40% tax on earnings between £50,271 and £125,140.
Additional Rate: 45% tax on earnings over £125,140.
These rates and bands apply to England, Wales and Northern Ireland. Different Income Tax rates and bands apply in Scotland.
To gain a comprehensive understanding of your Income Tax obligations, it is essential to review your Personal Allowance, tax code, and the amount of tax paid and anticipated for the year.
Additionally, there are tax-free allowances for savings interest, dividends from share ownership, self-employment income (up to £1,000 through the trading allowance), and rental income (up to £1,000 unless using the Rent a Room Scheme). Any interest, dividends, or income exceeding these allowances is subject to taxation.
National Insurance (NI)
Your National Insurance record can affect your entitlement to the State Pension and certain benefits. Your National Insurance number is used to record contributions and related information.
Employees generally pay National Insurance on earnings above £242 per week, while self-employed individuals pay Class 4 National Insurance on annual profits above £12,570. Employees earning between £129 and £242 per week can generally build up their National Insurance record without paying contributions. Self-employed individuals with annual profits of at least £7,105 are treated as having paid Class 2 contributions to protect their National Insurance record, without having to pay them.
For the tax year 2026/27, the standard employee Class 1 National Insurance rates are 8% on weekly earnings above £242 up to £967, and 2% on earnings above £967. For self-employed individuals, Class 4 contributions are 6% on annual profits above £12,570 up to £50,270, and 2% on profits above £50,270. Compulsory Class 2 contributions were removed from April 2024. However, eligible self-employed individuals with annual profits below £7,105 can choose to pay voluntary Class 2 contributions at £3.65 per week.
Employers also generally pay employer Class 1 National Insurance at 15% on each employee's earnings above the relevant secondary threshold, equivalent to £5,000 per year for 2026/27. This is an additional cost to the employer and is not deducted from the employee's pay. Eligible employers may claim Employment Allowance to reduce their employer Class 1 National Insurance bill by up to £10,500 per tax year. Eligibility conditions and special rules for certain employees apply.
Business tax
Capital Gains Tax (CGT)
Capital Gains Tax is a tax levied on the profit obtained from the sale or disposal of assets that have increased in value. The tax is calculated based on the gain realized rather than the total amount received. For example, if an asset is purchased for £5,000 and subsequently sold for £25,000, the gain would amount to £20,000 (£25,000 minus £5,000). Certain assets are exempt from Capital Gains Tax. For the tax year 2026/27, individuals generally have an annual tax-free allowance of £3,000. Gains above the available allowance are generally taxed at 18% to the extent that they fall within the unused basic rate Income Tax band, and 24% on the remainder. Specific reliefs may apply. Disposing of an asset includes selling, gifting, transferring, exchanging it, or receiving compensation for its loss.
UK tax residents are generally subject to Capital Gains Tax on gains from assets worldwide, including overseas property and investments. From 6 April 2025, eligible individuals within their first four tax years of UK residence, following at least ten consecutive tax years of non-UK residence, may claim relief on qualifying foreign gains under the four-year Foreign Income and Gains (FIG) regime. Claiming this relief involves conditions and the loss of certain tax allowances.
Non-UK residents may still have to pay Capital Gains Tax on disposals of UK land and property, including certain indirect disposals through property-rich companies. Special rules may also bring certain gains made during a period of temporary non-residence into charge when an individual returns to the UK.
Inheritance Tax (IHT)
Inheritance Tax is a tax on the estate, including property, money and possessions, of someone who has died. The standard tax-free allowance, known as the nil-rate band, is £325,000. The standard Inheritance Tax rate is 40% on the taxable amount above the available allowances, after taking account of any exemptions and reliefs. Transfers to a spouse or civil partner and gifts to qualifying charities are generally exempt, although exceptions can apply. Reporting may still be required even where no tax is payable.
An additional residence nil-rate band of up to £175,000 may be available where a qualifying home is left to direct descendants, such as children or grandchildren, on death. This can increase an individual's total tax-free allowance to £500,000, subject to eligibility conditions. The residence nil-rate band is reduced for estates valued above £2 million. Unused nil-rate bands and residence nil-rate bands may be transferred to a surviving spouse or civil partner, potentially allowing a couple to pass on up to £1 million free of Inheritance Tax where all conditions are met.
From 6 April 2025, whether overseas assets fall within the scope of UK Inheritance Tax generally depends on long-term UK residence rather than domicile. Individuals who have been UK tax resident for at least 10 of the previous 20 tax years are generally within scope on their worldwide estate. These rules can continue to apply for a period after leaving the UK. Individuals who are not long-term UK residents may still be subject to Inheritance Tax on UK assets.
Value Added Tax (VAT)
For UK-established businesses, VAT registration is generally required if your VAT taxable turnover exceeds £90,000 over a rolling 12-month period, or if you expect it to exceed £90,000 in the next 30 days alone. VAT taxable turnover includes standard-rated, reduced-rated and zero-rated supplies, but generally excludes VAT-exempt supplies and supplies outside the scope of UK VAT. You can also register voluntarily if your taxable turnover is below the threshold.
Businesses with no UK establishment generally have to register for VAT when they make, or expect to make, taxable supplies in the UK, regardless of turnover. Exceptions can apply, including where the UK customer accounts for VAT under the reverse charge rules.
The standard VAT rate is 20%, with a reduced rate of 5% and a zero rate of 0% applying to certain goods and services. Some supplies are exempt from VAT. Once registered, you must account for VAT from your effective registration date, submit VAT returns and pay any VAT due to HMRC by the relevant deadlines. VAT on eligible business purchases may be recoverable, subject to the applicable rules.
Corporation Tax (CT)
Corporation Tax is charged on the taxable profits of limited companies and certain other organisations, including clubs, co-operatives and unincorporated associations. Overseas-incorporated companies may also be liable to UK Corporation Tax, depending on their tax residence and UK activities. Organisations within the scope of Corporation Tax are responsible for calculating their tax liability, paying any tax due and meeting their reporting obligations to HMRC.
Companies must notify HMRC when they become active for Corporation Tax purposes, maintain accounting records and prepare a Company Tax Return to calculate their taxable profits and tax liability. The filing deadline is generally 12 months after the end of the accounting period. Corporation Tax is normally payable earlier, nine months and one day after the end of that period. Larger companies may need to pay by instalments.
The main Corporation Tax rate is 25%, with a small profits rate of 19% available to eligible companies. For a 12-month accounting period with no associated companies:
Eligible companies with profits of £50,000 or less generally pay the small profits rate of 19%.
Companies with profits above £250,000 generally pay the main rate of 25%.
Eligible companies with profits between £50,000 and £250,000 may claim Marginal Relief, which reduces the amount payable at the main rate.
The £50,000 and £250,000 thresholds are reduced proportionately for shorter accounting periods and divided by the total number of associated companies, including the company itself. Some companies, including close investment-holding companies, are not eligible for the small profits rate or Marginal Relief.
Construction Industry Scheme (CIS)
Under the Construction Industry Scheme (CIS), contractors generally deduct money from payments to subcontractors for construction work and pay it to HMRC. These deductions count towards the subcontractor's tax liabilities and are not a separate tax. The usual deduction rates are 20% for registered subcontractors and 30% for unregistered subcontractors. Subcontractors approved by HMRC for gross payment status receive payments without CIS deductions.
Construction businesses that pay subcontractors for construction work must generally register as CIS contractors. Businesses outside the construction industry may also have to register if their construction expenditure exceeds £3 million over a rolling 12-month period, subject to exceptions. Subcontractors are not generally required to register, but registration normally reduces the deduction rate from 30% to 20%. Businesses acting as both contractors and subcontractors should register in both capacities.
Contractors must check workers' employment status, verify subcontractors with HMRC where required, apply the correct deductions and provide payment and deduction statements. Monthly CIS returns are normally due by the 19th following the end of the relevant tax month. Contractors must also pay any deductions to HMRC by the applicable payment deadline.
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