Who Has to Pay Tax in the UK?

December 7, 2022

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The main taxes that a person faces in the UK are related to income from various sources. One exception is VAT: everyone pays it regardless of whether they earn money since it is included in the price of the goods. British residents are responsible for paying taxes, which are calculated according to the following formula: your personal income and benefits are summed up, and your allowance is deducted from there. Then you pay an appropriate rate on the difference. 

Everyone, including students, have what is called a personal allowance. In 2022/23, you can have a personal allowance of £12,570, which exempts income below this level from taxation. Hence, if you earn less than this amount, you should not pay anything to the state. 

According to governmental statistics, about 32 million people pay taxes in the UK. Income tax rates in the UK vary depending on a person’s income. The bands, or steps that are determined based on income, influence other tax rates like capital gains. 

Tax rates in the UK are the same for all people, regardless of their residency status. But, the status of a UK resident determines which sources of income should be indicated in the person’s tax declaration. An individual who is a resident of the United Kingdom for tax purposes will be taxed based on their income worldwide, taking into account their benefits, for the prevention of double taxation in certain countries. On the other hand, non-residents pay only based on income received within the UK. The UK does not accept joint declarations, meaning that each person must submit their own return.

Here we prepared three main ways to check whether you are a resident of the UK for tax purposes. Let’s take a look at them.

Automatic Overseas Test

There are 3 tests to look at.

The first AOS states that you will be classified as a non-UK resident if:

  • you were resident in the UK for one or more of the three tax years before the current one;
  • you spend fewer than 16 days in the UK in the relevant tax year. 

The second AOS will indicate you are a non-UK resident if:

  • you were resident in the UK for none of the three tax years before the current tax year;
  • spend fewer than 46 days in the UK in the tax year.

The third AOS states that you are a non-UK resident if:

  • you work full-time abroad over the tax year;
  • you spend fewer than 91 days in the UK in the tax year;
  • the number of working days (more than 3 hours of work) is less than 31;
  • there is no significant break from your overseas work.

Automatic UK Residence Test

As an alternative to the automatic overseas test, you can check whether you are classified as a UK resident for the current tax year if you meet any of the following criteria of three automatic UK residence tests:

  • you spend at least 183 days in the UK during the relevant year;
  • your main home is located in the UK, and you’ve owned, rented, or been present in it for a total of at least 91 days, including 30 days at any time during the year;
  • you work full-time in the UK for any period during the year with no significant break of 31 days or more. At least 274 of the days must be in the relevant tax year.

You can also read additional governmental documents to learn more. 

Connections to the UK Test

There are situations when the status remains unclear after the first two testing options. In this case, if you are not sure that you meet these conditions, your connections in Britain will help determine your UK tax resident status.

The logic is simple: the more connections you have with the UK, the less time you can spend on its territory without becoming a resident of the UK; in contrast, the fewer ties you have, the longer you can spend in the UK before applying for a residence permit in the UK.

You can pass a statutory test to define your UK residence status on HM Revenue & Customs website.

If you stay in the UK from 16 to 45 days and you have at least four obvious ties, you can be considered a tax resident. The number of ties required decreases depending on the length of your stay in the UK. Here are points evaluated as part of the sufficient connections test and include these conditions:

  • Family: spouse and/or minor children residing in the UK;
  • Accommodation: a place of accommodation was available for 91 or more days in a row, even if you spent only one night there;
  • Job: you worked in the UK for at least 40 days during the relevant year;
  • Substantial visits: you had a stay of 90 days or more in the UK in one or two previous years;
  • Favoured country: you spent more days in Britain than in any other country.

Who Is Exempt from Taxes in the UK?

In Britain, there is a possibility of exemption from paying taxes. You can apply for tax exemption in the UK if you meet the following criteria: 

  • if you have been a tax resident for one or more of the last three tax years and have spent less than 16 days in the UK during the current tax year. 
  • if you have not been a tax resident for any of the last three years and have spent less than 46 days in the UK. The acceptable time increases to 91 days if you have worked full-time abroad.

Payment of Income Tax as an Employee

For most people who receive income from an employer, UK income taxes and National Insurance (social security) contributions are automatically deducted from their wages.

Usually, the employer uses the PAYE system (Pay as You Earn) to deduct taxes and contributions from your salary before paying you. People who retire in the UK also pay British income tax on their pensions.

British Tax System for Foreigners

As a general rule, ex-pat residents pay British tax in the same way as citizens, at the same rates. Also, taxes are imposed on all types of remuneration and benefits, including school tuition fees and cost-of-living allowances. However, under certain conditions, employer contributions to a foreign pension plan may not be taxed, and workers’ contributions may be deductible.

The UK signed double-taxation avoidance agreements with 130+ countries, which makes it one of the greatest networks in the world. These include Australia, Russia, the United Arab Emirates, Saudi Arabia, the Netherlands, France, Germany, and the USA. If you are taxed at the source of income, not in Britain, you can claim tax relief to return some part or all of that tax. But, how you do this depends on a number of factors, such as your UK tax residency. That’s why we mentioned earlier several testing options for you to determine your status.

90% of annuities and pensions paid to UK residents abroad, including unauthorised payments like early payments and some lump-sum payments, are taxable in the UK. This basically means that pensions that are paid to UK residents are taxed equally regardless of whether the scheme is based in the UK or abroad. Usually, you need to consult with your pension provider to find out more details on how you should be taxed.

United Kingdom & Automatic Exchange of Information (AEOI)

The UK has signed an agreement on participation in the Automatic Exchange of Information system (AEOI), which allows tax authorities to exchange information regarding actions with financial accounts and investments between several countries. It may affect you if you meet the following criteria:

  • you open or hold a UK bank or building society account;
  • if you purchase and hold investments through an investment/insurance company, you are a trustee, have a stake in certain types of trusts, or receive payments from charity organisations.

If you opened an account before January 1, 2016, you might receive a message or a call from your account provider that contacts you to confirm your tax resident status. To be specific, you can expect to be contacted if you provide your bank with a foreign address for correspondence. It is crucial that you respond to any inquiries from your bank; otherwise, they may provide HMRC with incorrect information.

As part of the AEOI agreement, HM Revenue & Customs shares information with the tax authority in the country where you may be a tax resident. If you have an account overseas and are a UK tax resident, HMRC will receive information from the relevant tax authority. 

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