Taxes in the UK: How to Pay Less Without Breaking the Law

What is a tax residency?

What is a difference between a country resident and a tax resident?

Sometimes inexperienced people confuse their immigration status with their tax status because both use the term ‘resident’. When a person is called a British resident, it usually means that they have permission to live in the country: a long-term visa, permanent residency or citizenship. But the mere fact that you have such a document does not make you a tax resident.

In most cases, you must continuously stay in the country for more than 183 days to become a tax resident. However, under UK law you can live for a shorter period but still be considered a tax resident if you fall under a number of other criteria.

How do I determine my tax status?

There is a special UK Revenue Service test to determine your tax status. You can also use our online form created by Imperial & Legal immigration advisors and based on the official test questions.

Do you have to pay tax if you are not a UK tax resident?

Under UK law, tax residents are required to declare and pay tax on any income earned both inside and outside the UK. However, not being tax resident does not exempt you from paying tax.

Taxes on all income earned within the country must be paid to the Treasury. So, even if you are not tax resident, you will need to pay tax on any income you receive in the UK.

Double taxation

The UK has special double tax treaties with many countries. These are based on the principle that a resident pays tax on income in the country where it was actually earned. Before paying tax, we recommend checking whether there is such an agreement with the country of origin of your income.

Special tax treatment

In UK tax law, this concept plays a special role in determining tax liabilities. Thus, most foreigners have non-domicile resident status in the UK. On this basis, they can use a special tax treatment called remittance basis.

How the remittance basis works

If you choose this tax treatment, you will only have to pay tax on income that you earn in the UK or bring into the country. Income received outside and not brought into the UK is not taxable.

If you want to live in the UK but don’t want to pay tax on property, business income or capital gains that you own abroad, remittance basis can be beneficial to you. But you need to be aware of the restrictions this treatment imposes. For example, the UK has a personal tax allowance whereby the first £12,570 of your annual income is tax free. However, those who choose to pay tax on remittance basis automatically lose the tax allowance.

I would like to emphasize once again that each year, when preparing your tax return, you have the flexibility to choose the tax treatment that best suits your financial situation. This allows you to tailor your approach based on your individual circumstances, ensuring that you can optimize your tax strategy to align with your goals and obligations. By reviewing the available options, you can select the most advantageous tax treatment, giving you greater control over your financial planning for the year ahead.

Vasily Kluev

Client Service Director, Immigration Adviser (OISC)

Who can’t use the remittance basis

Anyone who has domicile status in the UK. Plus, if you have been a UK tax resident for 15 of the 20 preceding tax years, you automatically become a deemed domicile and lose the right to use the remittance basis. In this case, all your assets will be taxed: income received both inside and outside the country, as well as inheritance.

How to keep using the remittance basis

The only way to retain non-domicile status and continue to use the remittance basis is to cease to be UK tax resident for 6 full tax years. You don’t have to leave the UK for many years to do this: there are specific criteria that a person must meet to get rid of their UK tax residency status. You can read more about it here. It is important to understand that the more you are connected to your new home country, the more difficult it will be to stay here for a long time. In some cases, the total amount of time you can spend in the UK without repercussions will be only 45 days per tax year.

Temporary non-resident taxpayer

If you have been a tax resident for 4 or more tax years (including partial years of residency, e.g. a period from when you first moved to 5 April), after you leave the country, you will remain a temporary tax non-resident for 5 full tax years. In this case, special tax rules will apply to you. For example, if you return to the UK during these 5 years you will have to pay tax on certain types of income earned while you were away, such as capital gains.

What taxes do individuals pay in the UK

Income tax

Income tax is imposed on:

• for tax residents of the United Kingdom — all income recieved whether domestically or abroad;
• for foreigners — income earned in the United Kingdom.

There is a progressive tax scale. The more you earn in a tax year, the higher the percentage rate of the tax. The amount of tax also depends on the source of income, preferential treatment and tax liability origin.

Income tax rates in England, Wales and Northern Ireland

Income tax rates in Scotland

Example of how to calculate income tax in England

Let’s see an example of how to calculate personal income tax. Suppose that a tax resident was able to earn £58,500 in the tax year.

• The first 12,570 of his annual income constitutes a primary tax deduction (personal tax allowance) and is not taxable.
• A basic rate of 20 per cent applies to the part of income between £12,571 and £50,270.
• Finally, those £8,230 over 50,270 will be charged income tax at an increased rate of 40%.

Thus, the amount of income tax for the reporting period will be as follows:

(50,270 – 12,570) x 0,2 + (58,500 – 50,270) x 0,4 = £7,540 + 3,292 = £10,832

Tax on savings interest

Together with other income, it is paid at the general rate of income tax. However, in addition to the primary tax credit, the first £5,000 of savings income is tax free. However, the total tax-free amount cannot exceed £17,570.

Moreover, every £1 of the main income above your personal allowance reduces the deduction for the savings interest tax by £1. So, if your total income for the year was £16,000, only the first £1,570 of your savings income will be tax free.

Tax rates on dividends from UK companies

*The preferential rate on the first £500 of dividends, announced for the 2024/2025 tax year. For 2023/2024 this rate is £1,000.

Capital gain tax

CGT (Capital gain tax) applies to gains realised on the sale of shares, bonds, real estate or other property.

There is a separate taxation scale for calculating CGT.

• 0% tax rate applies to the first £3,000 of income;
• A basic rate of CGT of 10 per cent applies to income between £3,001 and £37,700;
• A 20% rate of tax applies to income over £37,700, in most cases.

In addition, separate CGT rates apply to income received from the sale of residential property and deferred interest of a manager in an investment fund. In these cases, the basic rate will be 18% and the additional rate will be 28%.

Annual tax on enveloped dwellings (ATED)

The tax is imposed on residential property that:

• owned indirectly by individuals through companies, partnerships and investment funds;
• is not used for business purposes, e.g. not rented out;
• is worth over £500,000.

The progressive ATED property tax scale is calculated separately for each financial year according to the consumer price index. In the 2023/2024 tax period, it follows the scale:

Inheritance tax

It is a 40% tax which is paid before distribution of inheritance between heirs if the value of the estate of a deceased UK tax resident exceeds £325,000.

There is no inheritance tax to pay if assets pass to a UK domiciled spouse or civil partner. However, there is an exception to this rule, if the assets were owned by a UK domiciled resident and are transferred to a non-domiciled foreign spouse, only the first £325,000 will be exempt from inheritance tax.

Gift tax

Under UK law, a person has no tax liability on the mere fact of receiving a gift. However, if the gift is over a certain amount, it falls under the special rules of the Inheritance Act. In this case, tax liability arises, but only in case of the death of the giver.

Let’s stop on a few details. Firstly, not only money, property or stock can be considered a gift, but also the difference in the purchase and sale price if you sell something below market value.

Secondly, a UK tax resident can give up to £3,000 worth of gifts in one financial year. If you have not spent the limit in the previous year, you can use it in the next year.

There is no limit on the amount of gifts made by spouses and civil partners to each other if:

1. Both spouses are permanent residents of the United Kingdom.
2. Their marriage or civil partnership is officially registered.

Tax exemptions also apply to wedding gifts made to children, grandchildren and even strangers. Residents’ property donated to charitable organisations and political parties is not subject to tax.

Finally, if any assets have been transferred to a third party and the donor dies within the next 7 years, such assets are taxed as inherited. The earlier the property was gifted, the lower the tax will be:

Stamp Duty

It is traditionally imposed on legal documents for certain transactions and deals which require a government stamp to be attached. In the UK, this tax is paid by purchasers and tenants of residential and non-residential property, as well as purchasers of shares in companies.

Stamp Duty Land Tax

Varies from region to region in the United Kingdom.

In England and Northern Ireland there is a progressive scale for stamp duty land tax. The amount of tax is directly proportional to the value of the property purchased. The rate of stamp duty on the purchase of residential property can reach 15% of its value, if a person already owns a house or flat, and 12%, if the housing is purchased for the first time and the buyer intends to make it his home. Non-residents buying residential property in the UK pay an additional 2% of the value of the property as stamp duty.

In Wales, the local equivalent of stamp duty is also charged on a progressive scale. A maximum rate of 12% applies if a residential property is bought for the first time and its value is over £1.5m. Stamp duty increases by 4% if a person buys a second house or flat.

In Scotland, the rate of stamp duty for an individual can be as high as 12% if the property is purchased for the first time and its value exceeds £750,000. The purchase of a second residential property or a property to be rented out increases the stamp duty rate by 6%.

Separate tax rates are charged on the purchase of non-residential property.

Stamp duty reserve tax

The stamp duty is also applied on any stock transactions in the UK. The standard rate in this case is 0.5% of the value of the acquired assets. In exceptional cases, a special rate of 1.5% is applied.

Council Tax

This is tax that you have to pay to your local council for living in a house or flat. It is also paid by tenants of commercial premises. As a rule, the money collected in this way is used to improve the neighbourhood, maintain order and provide emergency services. The tax rate varies from municipality to municipality and depends on the value of the property.