United Kingdom Tax Law

Sources of UK Tax Law

UK tax law derives principally from statute, with no codified constitution constraining legislative sovereignty. The principal statutes include the Income Tax Act 2007 (ITA 2007), the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), the Corporation Tax Act 2009 and 2010 (CTA 2009, CTA 2010), the Taxation of Chargeable Gains Act 1992 (TCGA 1992), the Value Added Tax Act 1994, and the Inheritance Tax Act 1984. Each year, the Finance Act enacts the Budget resolutions, amending existing tax legislation. HM Revenue and Customs (HMRC) publishes guidance in the form of manuals, statements of practice, and extra-statutory concessions, though these do not have the force of law. Tax disputes are adjudicated by the First-tier Tribunal (Tax Chamber), with appeals to the Upper Tribunal and onward to the Court of Appeal and the Supreme Court.

Income Tax

The personal allowance for 2024–25 stands at £12,570, with a taper reducing the allowance by £1 for every £2 of income above £100,000. The basic rate of 20% applies to income between £12,571 and £50,270, the higher rate of 40% applies between £50,271 and £125,140, and the additional rate of 45% applies above £125,140. The dividend allowance (first £500 of dividend income tax-free for 2024–25) is supplemented by dividend tax rates of 8.75% for basic rate, 33.75% for higher rate, and 39.35% for additional rate taxpayers. The personal savings allowance permits basic rate taxpayers to earn £1,000 of savings interest tax-free (£500 for higher rate, nil for additional rate). The PAYE (Pay As You Earn) system requires employers to deduct income tax and National Insurance contributions (NICs) at source from employment income. The self-employed are assessed on trading profits under Part 2 ITTOIA 2005, with Class 2 and Class 4 NICs payable alongside income tax. The statutory residence test determines an individual’s residence status, while the remittance basis allows non-domiciled individuals to be taxed only on UK-source income and foreign income remitted to the UK.

Capital Gains Tax

The annual exempt amount for 2024–25 is £3,000 for individuals. The rate of capital gains tax (CGT) is 10% for basic rate taxpayers and 20% for higher rate taxpayers on most assets, with an 18% rate for basic rate and 24% for higher rate taxpayers on residential property disposals. Principal private residence relief exempts the gain on a taxpayer’s main home from CGT. Business Asset Disposal Relief (formerly entrepreneurs’ relief) applies a 10% rate on qualifying business disposals, subject to a £1 million lifetime limit. Holdover relief under § 165 TCGA 1992 postpones gains on gifts of business assets, and gift relief under § 260 applies to assets subject to inheritance tax. Capital losses are set against current year gains or carried forward.

Corporation Tax

From April 2023, the main rate of corporation tax is 25% for companies with profits exceeding £250,000. The small profits rate of 19% applies to profits below £50,000, with marginal relief tapering the rate between £50,000 and £250,000. Large companies pay corporation tax in quarterly instalment payments. The corporate interest restriction limits interest deductions to 30% of tax-EBITDA for groups. The UK implemented the OECD Pillar Two global minimum tax rules through the Multinational Top-up Tax and Domestic Top-up Tax effective for accounting periods beginning on or after 31 December 2023. Capital allowances replace commercial depreciation, with the full-expensing regime allowing 100% first-year relief on qualifying plant and machinery.

Value Added Tax

The standard VAT rate is 20%, with a reduced rate of 5% for domestic fuel, children’s car seats, and certain home renovations. Zero-rated supplies include most food, children’s clothing, books, and public transport. Exempt supplies include financial services, insurance, education, and health. The VAT registration threshold is £90,000 (2024–25). Businesses may use the annual accounting scheme and the flat rate scheme, the latter allowing simplified VAT accounting for small businesses with a fixed percentage of turnover. The place of supply rules determine whether UK VAT applies, and the reverse charge mechanism applies to cross-border services.

Inheritance Tax

Inheritance tax (IHT) is charged at 40% on estates exceeding the nil-rate band of £325,000. The residence nil-rate band of £175,000 applies when a residence is inherited by direct descendants, tapering for estates exceeding £2 million. The spouse exemption provides unlimited relief for transfers between spouses and civil partners. Gifts made more than seven years before death are potentially exempt transfers (PETs), with taper relief reducing the IHT rate on gifts made between three and seven years before death. The rates for lifetime chargeable transfers are 20%.

Tax Administration

HMRC operates under a self-assessment system. Taxpayers file annual returns, with penalties for late filing and late payment. HMRC’s compliance powers include information notices, inspections, and criminal investigation. The Serial Tax Avoidance regime imposes surcharges on users of defeated tax avoidance schemes. The General Anti-Abuse Rule (GAAR) targets abusive tax arrangements, with a GAAR advisory panel providing opinions.