property value (in GBP) | ATED (in GBP)

500,000 to 1,000,000 | 4.150

1,000,001 to 2,000,000 | 8,400

2,000,001 to 5,000,000 | 28.650

5,000,001 to 10,000,000 | 67,050

10,000,001 to 20,000,000 | 134,550

over 20,000,000 | 269,450

England was a pioneer in introducing modern tax laws. Many countries have followed this example. But how exactly do you pay taxes in the UK today? We take a look at the current tax law of the British. On the extensive regulations on tax liability and the world income principle, we come to income tax and corporate tax as well as all other, essential types of tax that exist in Great Britain. Because the tax law in the UK has more to offer than many a curiosity (for example, sugar tax, tax exemption for a bridge, stove tax, window tax). This also includes a non-dom taxation, which is characteristic of many classic tax havens.

1st Taxation in the UK – Introduction

If you compare taxes worldwide, you will find amazing parallels. One example is the performance principle. It is also used in Germany. Nevertheless, this is hardly surprising, because the modern taxation system has finally proven to be superior for many good reasons. In addition, however, there are certain differences that distinguish some states from the rest of the world. Trust law is particularly prominent for Anglo-Saxon tax law. In addition, case law applies in the Anglo-Saxon legal system. It is therefore distinguished by the fact that precedents are regarded as pointing the way forward for further case law. This may have advantages as well as disadvantages, but creates a certain legal certainty. And this is – despite all complexity also in tax matters – a characteristic of Anglo-Saxon tax law.

What we are already on the subject. Because in this article we would like to take a look at the tax law that prevails today in the country from which the Anglo-Saxon tax law originated and gained worldwide importance. We look at how to pay taxes in the UK.

2.Taxes in the UK: a search for traces

Whoever expects at this point one of our introductions into the nature and culture of the state to be considered, as we often send it in advance in comparable articles as an attunement, meets here a small surprise. Because instead, we want to do a little bit of etymology. More specifically, we want to find out where the English word for tax, i.e. “tax”, comes from. Perhaps a similar sounding German verb comes to mind spontaneously, namely taxing. The word taxi also seems to indicate a certain connection with the English “tax”. So it stands to reason that one finds the origin of these words in one of the two languages or in a third.

In fact, it goes back to at least one fifth language. Originally, the ancient Greek word “taxis” stands for order, classification or structure. Therefore, the word taxonomy, whether in biology or in other respects, is quite close to its original meaning.

Through the transposition into Latin, however, this word has undergone a certain extension of meaning. For by the Latin “taxare” one understands a verb that estimate, assess, weigh and express similar facts.

Which brings us quite close to the current meaning of the English word “tax”. Because in the Middle Ages, when you assessed the value of damage, you already spoke of “tax”. This word had apparently been adopted by the French. And since levies were generally also levied on goods, for example on agricultural products or on commercial goods, it was obvious that the same word was used for the value of goods as a basis of assessment.

3.Taxes in the UK: Tax liability regulations

3.1. Review procedure on tax liability in the UK

In the UK you are considered a taxable person if you meet a number of criteria. It follows a certain order in the review of the criteria. This test is known in English tax law as the “statutory residence test” (SRT) and consists of three elements, the “automatic UK residence tests”, the “automatic overseas tests” and the “sufficient ties test”.

In order to move from a general tax liability to an unlimited tax liability, however, a factor must still be given. This concerns the existence and use of a residence in the United Kingdom. Only when this condition is also met is there an unlimited tax liability. The examination of tax liability is thus decisive in the question of whether taxes are incurred in the UK.

3.1.1. Criteria for a tax liability in the UK (automatic UK residence tests)

First, check whether a person was present in the UK for at least 183 days in the year of disposition. Presence on a day is defined as presence at the end of a day.

If the length of stay was shorter, the next step is to check if there was a residence in the UK alone for at least 91 days.

The next level is looking at the development of the person’s activity in the UK. If she worked 365 days full-time with at least 35 hours per week, she is considered to be taxable in the UK. Shorter under-year interruptions are ignored.

The fourth and final investigation is unusual. If you die and have already been taxable in the United Kingdom in the previous three years and have had a residence in the United Kingdom, then this person also has a tax liability for the year of death.

3.1.2 Criteria for exclusion of tax liability in the UK (automatic overseas tests)

In addition, however, you also have to examine the criteria that exclude tax liability in the UK. Only if one of these conditions applies, while at the same time none of the previously examined tax liability criteria is available, no tax liability is assumed for the person to be assessed.

This is how to see if a person who has been taxable in the UK for at least one year in the previous three years stayed in that country for a maximum of 15 days during the assessment period under consideration. If this was the case, the tax liability for the year under consideration is eliminated.

If there has been no tax liability in the UK in the previous three years and the person has been present in this country for a maximum of 45 days in the relevant tax period, a tax liability is also excluded.

The same applies to people working both abroad and in the UK. To do this, you have to check whether the person worked in the UK for a maximum of 30 days and stayed there for a maximum of 90 days. A working day in the United Kingdom shall mean a working time of at least three hours per day.

Here too, the death of a person is included in the considerations. If a person who has not been liable for tax in the UK in the previous two years dies and has been present in that country for a maximum of 45 days, there is no tax liability during that assessment period.

3.1.3. Sufficient ties test

In the unlikely event that none of the aforementioned criteria can neither exclude nor confirm a tax liability in the United Kingdom, one also examines certain personal connection points of the person to be considered. If the person has not been a taxable person in the United Kingdom in any of the previous three years, the following four criteria should be considered as potential points of reference:

The first aspect is the existence of a family connection point, i.e. whether the family of a person in question lives in the UK.

The second aspect is the question of whether the person to be examined has had unrestricted accommodation for at least 91 days during the assessment period and has used this option for at least one overnight stay. This is therefore an accommodation connection point.

There may also be a starting point in connection with a work activity. This is the case if a work period of at least three hours was carried out at least 40 days a year. In addition, a day is considered a relevant working day even if the person starts work in the UK and then leaves the country. In this case, the duration is irrelevant. It only matters that the work began in the UK.

Furthermore, it is counted whether a stay of a total of 90 days was present in one of the two previous assessment periods.

And finally one finds out whether the person stayed more days in the year under consideration in Great Britain than in any other country. If this was the case, there is a tax link with the UK. This is true even if the length of stay in at least one other country was the same as in the UK.

3.2 Scope of taxation in UK tax law

As in most industrial nations of the world – and unlike in many a tax haven – the world income principle applies in Britain.

At this point it should be noted that the performance principle is also of central importance. After all, it was the Scottish moral philosopher Adam Smith who emphasized the equity of taxation. But also other taxation principles, which are still generally applied today, go back to Adam Smith.

4. What taxes are there in the UK?

4.1.Taxes in the UK: Income Tax

In the UK, you can distinguish between two types of taxation in terms of income tax. On the one hand, the very normal taxation applies to unrestricted and limited taxable persons. On the other hand, taxpayers with a non-dom status can also opt for remittance base taxation. Then taxes are only due on the capital income paid out or used in Great Britain.

4.1.1. Regular income taxation

4.1.1.1. Determination of taxable income

When determining taxable income in the UK, all types of income known from Germany come into consideration. In addition to income from employment (wages and salaries as well as associated monetary remuneration of all kinds), income from self-employment in the broadest sense (including commercial transactions and independent pursuit of professional activities) and capital income as well as rental income are affected. However, special rules apply to certain income, such as the recognition of interest income.

In contrast to German income tax law, it is surprising that there is no deduction option in the UK for a whole range of advertising costs and special expenses. This applies, for example, to travel costs to the workplace, childcare, costs for medical care services and insurance contributions including all social security contributions. Only in a few situations are exceptions provided for in British tax law.

4.1.1.2. Taxes on income in the UK

First you add up all income and then deduct a basic allowance and other allowable deductions. The basic allowance is GBP 12,570 in the UK in 2023. However, it does not apply to income above GBP 125,140. Incidentally, the basic allowance does not apply even when remittance taxation is applied (see below).

The taxable income determined in this way is subject to a complex, differentiated tax rate system. At this point, one must distinguish whether parts of the income come from interest income or from other sources. If the share from other sources is a maximum of GBP 5,000 and there is interest income at the same time, the interest income up to GBP 5,000 is subject to a tax rate of 0%. Otherwise, taxation starts from the first pound – with a tax rate of 20% up to an income of GBP 37,700. From GBP 37,701 up to GBP 125,140 the income is then already subject to a tax rate of 40%. In Great Britain, more than 45% of the income is taxed.

By the way, for dividends received, there is an own allowance of GBP 1,000. Nevertheless, this share of income is also part of the taxable income, so that no actual deduction from income takes place here.

4.1.1.3. Payroll tax and tax treatment of pension contributions

Income from employment is, as in Germany, subject to withholding tax, which thus corresponds to a wage tax equivalent. Employers carry them out regularly. You must ensure that any deductions are already taken into account, for example for contributions in pension funds. This is interesting because in the UK you get a tax deduction of the same amount. This deduction can even take place 100% of the income under certain conditions.

However, there is an upper limit of GBP 60,000 per year. However, this limit will be reduced if the sum of the annual income from the employment relationship plus the employer's contributions to the retirement provision exceeds GBP 260,000.

It is also interesting that unused deductions for retirement provision can be carried forward for up to three years.

4.1.1.4. Taxation of retirement benefits

In the case of the taxation of pensions and other retirement benefits, one goes one’s own way in the UK. For example, pensions and comparable entitlements or savings can be transferred to retirement provision. If the transfer takes place by inheritance and the testator is not yet 75 years old, the heirs receive the benefits tax-free. Otherwise, taxes in the UK are quite regular according to the regulations of income tax law.

4.1.1.5. Capital gains taxes in the UK

As already mentioned, capital income is also subject to income tax in the UK. Remarkably, interest income in the UK is not capital income in the strict sense. Capital income is understood to mean in particular profits from the sale of assets (such as a sale of real estate, but also for works of art). Capital Gains Tax (CGT) applies to them. It does not matter whether the profits come from the sale, exchange or any other matter involving a transfer. In addition, it is irrelevant how the sold asset was previously received.

You can set an allowance of GBP 6,000 (from 2024 GBP 3,000; for trusts always half). The special feature here is that specific tax rebates are granted for different situations, such as the sale of company shares or the main residence. In addition, all non-acquisitional and divestiture costs are recognised as well as costs that have contributed to the increase in value of measures.

The tax rates applicable to capital gains tax are based on the amount of taxable income. Here the general income levels apply (see above), but different tax rates. up to an income of GBP 37,700, the capital gains tax rate is 10 %, plus 20 %. In addition, different tax rates are provided for the sale of residential property. Increased tax rates of 18 % and 28 % respectively apply here.

Special rules apply to natural persons subject to limited taxation. In most cases, they are exempt from the CGT. However, if these are transactions involving real estate in the UK, they also have to pay taxes on their capital income in the UK.

4.1.2 Taxes in the UK: the Non Dom Regime

In addition to the regular income taxation in the UK, there is also a non-dom tax regime. Non Dom means non domiciled, i.e. without origin connection. This means people who have a residence in the UK but have moved from abroad, although there is no original connection to British citizenship (for example, by birth, via the parents). In this case, the UK grants far-reaching tax breaks similar to those in tax havens, which are also often familiar with a non-dom scheme.

4.1.2.1. Taxation of income from abroad (remittance basis) in the UK

Non Dom taxpayers are allowed to choose between regular income taxation and taxation according to the so-called “remittance basis”. This means that in the UK taxes are only payable on income that either flows from abroad into the country or is invested there. If there are sources of income abroad and the profits are paid out to a foreign account, there are no taxes in the UK.

However, some time restrictions must be observed. If a Non Dom person has been resident in the UK in 15 of the last 20 years, the Non Dom status expires.

4.1.2.2. When a flat-rate remittance base charge is incurred for remittance base taxation

In addition, depending on the existing Non Dom status as a taxpayer, a fixed lump-sum levy, the “remittance base charge” (RBC), is payable annually. With a duration of the Non Dom status of a maximum of seven years, a levy of GBP 30,000 is planned. If this duration increases within the last 14 years to a maximum of twelve years, the amount doubles.

However, there are also exceptions to the RBC. The first is for people under 18 who neither earn nor receive income from abroad in the UK. There is no RBC levy for them. Furthermore, this also applies to taxpayers who also do not earn domestic income and whose foreign inflows amount to a maximum of GBP 2,000 per year. In both cases, deductions for special expenses remain allowed. A third case in which no RBC is incurred, but there is also no entitlement to a deduction of special expenses, is if a taxable No Dom person has been resident in the UK for a maximum of seven years in the preceding nine years.

However, if such a non-dom person has been resident in the UK for the past seven or more years, then he/she is obliged to pay the RBC if he/she makes an application for remittance taxation. In addition, it is not entitled to any special deductions.

4.2.Corporation tax in the UK

Since 2023, the lump-sum corporate tax rate in the UK is 25%. Previously, it stood at 19%. As this represents a significant increase that is likely to result in significant tax burdens, especially for small corporations, it has been decided that the old tax rate will continue to apply to companies with a maximum annual profit of GBP 50,000.

Furthermore, UK tax law provides for a reduced tax rate of 10% on profits resulting from the use of patents. But this is more than a pure license-related tax relief. Although it also applies to royalties, trade in goods based on patents also benefits from this low tax rate. This is particularly interesting for drug manufacturers, for example.

Apart from that, British corporate tax law differs from Germany in that there are six corporate tax regimes. These include tonnage taxation, real estate investment trust (REIT), life insurance providers, banks, oil and gas companies, real estate corporations that trade, manage or develop residential properties, and holding companies that manage qualifying asset holding companies (QAHC). Each of these special tax regimes has its own rules. For example, a real estate corporation pays only 4% tax on profits over GBP 25,000,000 in the UK.

Furthermore, special features must be considered when determining profits or losses. In addition, there is the possibility of group taxation in Great Britain, which thus corresponds as far as possible to the taxation of a German body. Nevertheless, the differences in detail are numerous. In addition, there are various regulations that determine when a corporation is taxable in the United Kingdom. In addition to the classical establishment, many other facts are included, which deviate in some details from the recognized OECD regulations.

4.3. VAT

Value added tax (VAT) is a multi-phase VAT that consumers have to pay in the UK. It is generally associated with a tax rate of 20%. In addition, a reduced tax rate of 5% is provided for electricity or gas consumed in households. In addition, with some exceptions, a tax rate of 0% applies to books, public transport, food and other essential goods and services. At the same time, there is also a tax exemption for sports, cultural, health-promoting or charitable services, to name only the most important. However, unlike the services and goods which are subject to a VAT rate of 0 %, the exempt counterparts are not eligible for deduction.

4.4 Inheritance and Gift Tax in the UK

On the inheritance and gift tax in Great Britain we have King Charles III on the occasion of the succession to the throne. Already wrote an article. We therefore refer to this special article.

This gives us the opportunity to briefly discuss the non-dom regulations that are also relevant in this area. For example, non-dom status is lost for a person who has spent at least 15 years in the UK in the past 20 years. In addition, there are certain exceptions in the case of capital transfers between spouses and cohabiting partners with whom one has a non-dom status. Because then an allowance of GBP 325,000 applies. Otherwise, the transfer would be tax-free.

In this context, a reference to other property taxes is also useful. There is no property tax in the UK. In the 18th and 19th centuries, this was probably the most important tax in Great Britain. However, at that time it was first known as the stove tax and then as the window tax.

4.5 Stamp duty in the UK

In the UK, in addition to the CGT, there are further taxes on the transfer of real estate and other assets (e.g. company shares). The focus of our considerations is on the acquisition of real estate, because there are regional differences here. The stamp duty applicable in this respect has its own name in England and Northern Ireland, namely Stamp Duty Land Tax (SDLT). In Scotland and Wales it received its own designations. But it is basically the same tax.

4.5.1. Stamp duty in England and Northern Ireland

Certain divestments are subject to stamp duty in England and Northern Ireland. This includes, in particular, transfers of real estate, which is 15% for legal persons. However, this tax only applies if the property does not serve any of the legally specified corporate purposes. Even then, a cost share of up to GBP 500,000 remains tax-free.

However, if natural persons or trusts acquire a property for residential purposes, they pay 15% stamp duty if it is their second such property in their assets. Also for each further acquisition there are 15 % taxes. On the other hand, if it is their first real estate acquisition or if the acquisition takes place in parallel with the sale of their only residential property, the tax rate is 12 %. In all these cases, a tax-free share of GBP 1,500,000 is also available.

For persons subject to income tax abroad, there is an additional tax of 2% on the purchase of a residential property in England and Northern Ireland.

The acquisition of real estate that fulfils no or only partially a residential purpose is regulated differently. In this respect, a stamp duty of up to 5 % is required. However, this only applies to the amount that exceeds the acquisition cost by GBP 250,000.

4.5.2. Stamp duty in Scotland

Scotland partially follows a similar taxation system. Here, all real estate acquisitions are equally subject to taxation, which here is called Land and Building Transaction Tax (LBTT for short). The tax rate for residential properties is staggered and usually reaches a maximum of 12%. However, the tax only applies if the transfer value exceeds GBP 750,000. However, if it is the acquisition of an additional residential property or rental property, the tax rate increases by a further 6 % to a maximum of 18 %.

When acquiring real estate that serves no or only partially a residential purpose, a lower tax of up to 5% is to be paid instead on this non-residential part.

4.5.3. Stamp duty in Wales

The real estate transfer tax is also differentiated in Wales. It is a maximum of 12 % and, for residential properties, a transaction value above GBP 1,500,000. If it is an additional residential property or a rental property, the tax rate is 4 % more (thus up to 16 %).

Other real estate, i.e. non-residential or partially residential, is subject to a 6 % tax on the non-residential part in Wales.

4.6. Property tax in the UK

Similar to Germany, municipalities in Great Britain also levy taxes on real estate. However, only legal entities and companies (including partnerships) are affected by the Annual Tax on Enveloped Dwellings (ATED). Taxes only apply if the property value as at 01.04.2022 is above GBP 500,000. It is staggered. For 2023, the following values apply:

For this purpose, an annual adjustment of the level of taxes takes place, which is based on the general price development in Great Britain.

Local Taxes in the UK: Council Tax and Business Rates

4.7.1 Council Tax

Another form of taxation at local level is the so-called Council Tax. It also applies to residential properties. However, it only meets the owners of the properties in certain cases. This is only the case if the residential property in question is empty or occupied by several parties. Otherwise, residents of the residential property will pay the tax, provided they are at least 18 years old. There are also other derogations. For example, if only one person occupies a taxable property, the tax is reduced by 25%.

Again, there are differences in taxation between England, Scotland and Wales. There is no Council Tax in Northern Ireland, but a comparable tax, which is called Domestic Rates.

As far as taxation methods are concerned, however, they are quite similar in all parts of the country. This includes, among other things, that there are staggered tax rates that are based on the property value. The graduation takes place in England in eight so-called bands, i.e. classes (in Wales there are nine). Depending on the classification of the property value into one of these classes, taxation is carried out according to the locally collected tax rates.

4.7.2. Business rates

In addition to the levies on residential property, there is also a local levy on all other property values in the UK. Here again there are regional differences between England, Northern Ireland, Scotland and Wales as well as at local level. Even the business councils, which by no means correspond to the German trade tax, are taxes paid to the municipalities.

5th Tax in the UK – our conclusion

Tax law in the UK is similarly complex as in Germany. Some aspects, such as the distinction between types of income, are more uniform in the United Kingdom. Others, on the other hand, are teeming with derogations. This includes in particular the Non Dom tax regime, to which there is no counterpart in Germany. It is interesting that this status and the preferential taxation granted to it can be used for a maximum of 15 years. In any case, this is a point that invites a comparison with the taxation of wealthy foreign tax residents introduced in Switzerland or elsewhere.

Despite the amount of information provided here, it is only an overview limited to essential elements in UK tax law. Further taxes in the UK, such as on international passenger flights, the bingo tax or the so-called sugar tax, as well as many other details, such as special features for the recognition of the Remittance Base Charge abroad, remain outside the picture. Nevertheless, we hope that this article has given you a representative first insight into British tax law.