UK Personal Income Tax Overview (2024/25)
How Personal Income Tax Works
The UK income tax system operates on a graduated rate basis. This means that individuals pay a higher tax rate as their income increases. Income tax is levied on total earnings and investment income, minus certain deductions and allowances.
In the 2022 Autumn Budget, it was announced that key personal allowances and tax thresholds would be frozen until April 2028.
Personal Allowance
For the 2024/25 tax year, the personal allowance (the amount of income you can earn tax- free) is £12,570.
This allowance is available to most individuals unless:
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They choose the remittance basis (see below).
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Their income exceeds £125,140.
If you earn more than £100,000, your personal allowance is reduced by £1 for every £2 over this threshold.
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Income Tax Rates (England, Wales & Northern Ireland)
Note: Dividends are treated as the highest slice of income and are taxed accordingly. There is also a £500 dividend allowance for 2024/25.
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Scottish Income Tax Rates
If you are a Scottish resident, different income tax rates apply to most of your earnings:
Self-Assessment Tax Return:
A Self-Assessment tax return is the process HM Revenue and Customs (HMRC) uses to collect income tax in the UK. If your tax isn’t automatically deducted from your wages, pensions, or savings, you’re required to report your income and expenses directly to HMRC through a Self-Assessment tax return.
Who Needs to File a Self-Assessment Tax Return?
You may need to file a Self-Assessment tax return if you fall into one of the following categories:
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Self-Employed: If you’re self-employed as a sole trader and have earned more than £1,000 (before tax deductions).
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Partnership: If you’re a partner in a business partnership.
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High Earners: If your income exceeds £150,000 for tax year 2023/24. And from April 24, the threshold was abolished.
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Rental Income: If you receive income from renting out property.
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Savings and Investments: If you have income from dividends, savings, or investments that surpass certain thresholds.
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Foreign Income: If you receive income from overseas or own income-generating foreign properties.
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Capital Gains: If you’ve realised capital gains, such as from selling shares or property.
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Income from Trusts: If you receive income from a trust, settlement, or estate.
Key Dates to Remember
Staying compliant means being aware of these important deadlines:
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5 October: Deadline to register for Self-Assessment if you haven’t filed one before.
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31 October: Deadline for submitting paper tax returns.
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31 January: Deadline for submitting online tax returns and paying any tax owed.
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31 July: Deadline for the second payment on account.
Basis of Taxation in the UK
1. Residence
Your tax residence status is the primary factor in determining how your income will be taxed. An individual’s residence is based on the number of days they spend in the UK and other factors related to their connections to the UK. The Statutory Residence Test (SRT) helps establish your residence status.
UK Residents:
Worldwide Taxation: If you are a UK resident, you will generally be taxed on your worldwide income and gains. This means all your income, whether earned in the UK or abroad, is subject to UK tax.
Non-UK Residents:
UK-Source Income: Non-residents are usually only taxed on their UK-source income. This could include income from property in the UK, earnings from employment performed in the UK, or gains from selling UK assets.
3. Remittance Basis of Taxation (For Non-UK Domiciled Residents):
For individuals who are resident in the UK but not domiciled (or deemed domiciled) in the UK, they can elect to use the remittance basis of taxation.
How it Works:
Under the remittance basis, non-UK income and gains are only taxed if they are brought into or used in the UK. This can be an advantage for individuals with substantial foreign income, as they can keep those earnings tax-free as long as they are not "remitted" to the UK.
Remittance Basis Charge:
After being UK-resident for 7 out of the last 9 tax years, individuals wishing to continue using the remittance basis will need to pay an annual charge of £30,000. For those who have been UK-resident for 12 out of the last 14 tax years, the charge increases to £60,000.
Abolition in 2025:
From April 2025, the remittance basis will be abolished. After this date, non-domiciled individuals who have been UK residents for more than 4 years will be taxed on their worldwide income and gains, just like UK residents.
4. Deemed Domicile:
A person who is not originally domiciled in the UK can become deemed domiciled for tax purposes after being resident for 15 out of the last 20 tax years. Once deemed domiciled, they will no longer be able to use the remittance basis and will be taxed on their worldwide income and gains like UK-domiciled individuals.
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Inheritance Tax (IHT): Deemed domiciled individuals are also subject to UK inheritance tax on their worldwide assets.
For further advice on your personal tax situation, please get in touch with our tax expertise.
2.Domicile:
Domicile is a complex legal concept that determines your permanent home and can affect how your non-UK income is taxed, especially if you're using the remittance basis. It differs from citizenship, nationality, or residence.
These are three main types of domicile:
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Domicile of Origin: Where an individual is born, typically linked to the father's domicile at birth.
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Domicile of Dependency: A child's domicile generally follows that of their parent or guardian until they become independent.
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Domicile of Choice: When an individual moves to another country with the intention to settle their permanently.
If you are domiciled in the UK, you are taxed on your worldwide income and capital gains, regardless of where you earned them.