Guide to the UK Tax System

The UK tax system is considered one of the most developed and, at the same time, complex in Europe. It combines a wide range of mandatory payments applied both to individuals and companies. A proper understanding of which taxes in the UK relate to your activities helps not only to avoid penalties but also to optimise the financial burden.

In this guide, we will look at the key UK taxes: from income tax for individuals and national insurance contributions — to corporation tax, VAT, and special levies that affect business. We will also pay attention to the specifics of taxation for non-residents and entrepreneurs working in the international market.

This information will be useful for those planning to do business in the UK, invest in the local economy, or simply want to better navigate the British tax environment.

Taxes for Individuals in the UK (England)

The modern UK tax system is designed to cover all major sources of individual income: salary, investments, capital gains, and inheritance. Let’s look at the key taxes faced by every resident (and sometimes non-residents).

Income Tax UK – income tax

This is the main tax for individuals, paid on income from salaries, business activities, investments, and some social benefits.

The personal allowance (tax-free threshold) is £12,570 per year. If an individual’s annual income is less than this amount – no tax is charged.

Thus, for income above £12,570 per year, the following tax bands apply:

• Basic rate (20%) – applies to income from £12,571 to £50,270.
• Higher rate (40%) – for income from £50,271 to £125,140.
• Additional rate (45%) – for income above £125,140.

National Insurance Contributions (NICs)

NICs are paid to fund the state pension, unemployment benefits, and other social payments. In the UK, there are several classes of National Insurance Contributions, depending on status (employee, employer, or self-employed).

Classes of NICs in the UK

Class 1 – contributions of employees and employers

• Paid from wages.
• Employees pay 8% on income from £12,570 to £50,270 or 2% on income above £50,270.
• Employers additionally pay 15% for each employee on salaries above £5,000 per year.

Class 2 – contributions of the self-employed

• A fixed rate paid if annual profit exceeds £12,570.
• As of 2025: £3.45 per week.
• If profit is below the threshold, the contribution may be paid voluntarily to count towards the pension record.

Class 3 – voluntary contributions

• Intended for those who do not work in the UK or have breaks in NICs payments but want to keep entitlement to a state pension and other social benefits.
• Rate: about £17.45 per week (2024-2025) and £17.75 per week (2025-2026).
• Example: if a person worked abroad for several years and did not pay NICs, they can “buy back” those years through Class 3.

Class 4 – contributions of the self-employed (in addition to Class 2)

• Calculated as a percentage of profit (similar to income tax for the self-employed).
• 6% – on profit from £12,570 to £50,270.
• 2% – on profit above £50,270.

Capital Gains Tax UK (CGT)

This tax is charged on individuals’ profit from the sale of assets – such as property, shares, or businesses. The annual exempt amount is £3,000.

CGT rates in the UK:

• 10% or 18% – for basic rate taxpayers.
• 20% or 24% – for higher rate taxpayers (depending on the type of asset).

Inheritance Tax (IHT)

Inheritance tax is charged on transfers of inheritance or large gifts exceeding the set threshold. As of 2025, the tax-free threshold is £325,000, and any amount above this is taxed at 40%. Transfers to a spouse or charitable organisations are exempt, allowing effective estate planning and minimisation of tax burdens.

Council Tax UK – local property tax

A mandatory tax paid by property owners or tenants. Its amount depends on the value of the property and the local council.

Stamp Duty Land Tax (SDLT)

Paid by the buyer of residential or commercial property.

For first-time buyers:

• Property worth up to £300,000 is exempt from SDLT.
• Property worth £300,001 to £500,000 is subject to 5% SDLT on the portion above £300,000.
• Property worth over £500,000 is not eligible for the first-time buyer relief and is subject to standard SDLT rates.

For second homes and buy-to-let properties:
An additional 3% applies to properties worth over £40,000.

For all buyers:
Standard SDLT rates apply as follows:

• Up to £125,000: 0%
• £125,001 to £250,000: 2%
• £250,001 to £925,000: 5%
• £925,001 to £1.5 million: 10%
• Above £1.5 million: 12%

Taxes for Businesses in the UK

The UK attracts entrepreneurs with a relatively transparent tax system and competitive rates. Companies face several key taxes, depending on business size, activity type, and number of employees.

Corporation Tax

The main tax on company profits. It applies to all companies registered in the UK and foreign companies with a permanent establishment in the country.

• Standard rate: 25%.
• Small profits rate: 19% for companies with profits up to £50,000.
• Marginal rate: applies to profits from £50,001 to £250,000, gradually increasing to the standard 25%.

Value Added Tax (VAT UK)

Similar to VAT in other countries, charged on sales of goods and services. The standard rate is 20%, but some goods and services are subject to a reduced rate of 5% (e.g., energy) and some to a zero rate of 0% (food, books, children’s items).

Companies must register for VAT if their annual turnover exceeds £90,000. VAT-registered businesses can reclaim VAT paid to suppliers, helping to avoid double taxation and reduce costs.

Business Rates – local tax on commercial property

Companies using offices, warehouses, shops, or other premises pay a local tax on business property. The rate depends on the “rateable value” (market value of the property) set by the local council.

Employer’s National Insurance

Employers are obliged to pay NICs for their employees. 15% on salaries above £5,000 per year. These contributions fund pensions and social benefits for employees.

Payroll taxes (PAYE)

PAYE (Pay As You Earn) is the system through which employers deduct income tax and NICs from employees’ salaries and transfer them to HMRC, the tax authority.

Dividend Tax

Company owners who receive dividends and are UK residents pay a separate tax. The dividend allowance is £500 per year.

Dividend tax rates (depending on tax band):

• 8.75% – basic rate.
• 33.75% – higher rate.
• 39.35% – additional rate.

This tax is particularly relevant for small company directors who pay themselves a minimal salary and take the rest of their income as dividends.

Thus, business in the UK deals not only with corporation tax but also with a range of other mandatory payments that impact financial planning.

Taxation and Incentives for the IT Sector

The UK is one of Europe’s leading hubs for IT business, offering not only a stable legal system but also a range of tax incentives. Special regimes apply for tech companies.

R&D Tax Relief

This programme encourages companies to invest in creating new products, software, and innovative solutions.

1. For SMEs: companies can recover up to 27% of R&D costs through tax relief or even cash payments.
2. For large companies (RDEC – Research and Development Expenditure Credit): a 20% credit is available on eligible research costs.

Patent Box Regime UK

This is a special tax regime in the UK for companies earning income from patented technologies. The essence is that profit related to patents (licensing, sales of products using patented technologies) is taxed at a reduced corporation tax rate of 10% instead of the standard 25%. This encourages innovation and investment in technology development.

To apply the regime, a patent must be registered and used in the company’s commercial activity. Profits eligible for Patent Box are calculated using a specific formula, considering income from patented products and the costs of creating them. Companies can combine Patent Box with other reliefs, such as R&D Tax Relief, to further optimise tax burdens and effectively develop IT and innovation businesses in the UK.

Taxation of Non-Residents in the UK

The UK tax system treats residents and non-residents differently. The main rule: non-residents pay tax only on UK-source income, while residents pay on worldwide income.

Determining UK Tax Residence

Residence is determined under the Statutory Residence Test (SRT), which considers:

• number of days spent in the UK during the tax year;
• having accommodation in the UK;
• work and personal ties with the UK.

The UK tax year runs from 6 April to 5 April of the following year.

Taxation of non-resident income:

• Income Tax: non-residents pay tax only on income earned in the UK (salary, business profits, rental income).
• Capital Gains Tax (CGT): non-residents pay CGT only on the sale of UK property. Sales of shares or assets outside the UK are usually not taxed.
• Corporation Tax: applies to foreign companies only if they have a permanent establishment in the UK.
• Personal Allowance: most non-residents are not entitled to the £12,570 allowance, though exceptions apply for citizens of the EU, Iceland, Norway, and some other states with special agreements.
• Double Tax Treaties: the UK has over 130 such treaties, helping to avoid double taxation of income and profits.
• Rental income from UK property is always taxed in the UK (under the Non-Resident Landlord Scheme).
• Property sales are subject to CGT at 18% or 28%, depending on income.
• If a non-resident opens a company in the UK, tax liability depends on whether the business is considered managed and controlled from the UK.

Thus, non-residents are taxed in the UK only on income connected to the country, but thanks to international treaties and special regimes, the risk of double taxation is significantly reduced.

The UK tax system is multi-component and covers a wide range of payments for both individuals and businesses. From income tax and national insurance contributions — to corporation tax, VAT, and special reliefs for innovative companies — each taxpayer must consider the specific rules applying to their activity.

Therefore, key takeaways about UK taxes:

1. For foreigners, correctly determining residence is crucial to avoid overpayment or double taxation.
2. IT companies and startups can significantly reduce tax burdens via R&D Relief and the Patent Box.
3. Company owners should optimise the balance between salary and dividends.
4. Consulting a tax advisor helps minimise risks and optimise tax expenses.

If you need assistance with tax planning in the UK or managing your tax burden, contact Azola Legal Services for consultation.