Moving to a new country can be an exciting adventure, but it comes with challenges. One of the biggest concerns for many expats is understanding the tax system in their new home. If you are moving to London, the tax system can be particularly complex, and it's important to understand how it works. In the UK, taxes are an essential source of revenue for the government. The revenue funds public services such as healthcare, education, and social welfare.

Understand the UK tax system

The tax system in the UK works on the principle of self-assessment. This means that individuals are responsible for calculating their tax liability and submitting their tax returns to HM Revenue and Customs (HMRC). The tax year in the UK starts on April 6th and ends on April 5th of the following year. As an expat in the UK, you must pay taxes on your income, including any earnings from employment, self-employment, or investments. The two main types of taxes in the UK are income tax and national insurance contributions.

Tax residency status

One of the first things you'll need to determine is your tax residency status. This will determine whether you're subject to UK taxes on your worldwide income or income earned in the UK. If you spend 183 days or more in the UK during a tax year, you'll be considered a tax resident and must pay taxes on your worldwide income. If you spend less than 183 days in the UK, you may still be considered a tax resident if you have ties to the UK, such as a permanent home or family.

Income Tax

The income tax system in the United Kingdom is designed to be progressive. This means that the percentage of tax you pay increases as your income increases. Currently, four tax bands apply in the UK, with rates ranging from 20% to 45%. For the tax year 2022/2023, the tax-free personal allowance is set at £12,570. This means you won't be taxed on the first £12,570 of your income. However, any income earned above this limit will be subject to the relevant tax rate.

  • Basic rate: 20% on income between £12,571 and £50,270
  • Higher rate: 40% on income between £50,271 and £150,000
  • Additional rate: 45% on income over £150,000
  • National Insurance Contributions
  • In addition to income tax, you'll be required to pay National Insurance (NI) contributions if you earn over a certain amount. National insurance contributions fund the UK's social security system, including state pensions, unemployment benefits, and the National Health Service (NHS).

If employed in the UK, you'll pay Class 1 NICs, calculated as a percentage of your earnings. For the 2022/2023 tax year, you'll pay 12% on earnings between £184 and £967 per week and 2% on earnings over £967 per week. Your employer will also pay NICs on your behalf.

If you're self-employed, you'll pay a different type of national insurance contribution called Class 2 NICs. For the 2022/2023 tax year, you'll pay £3.05 per week if your profits are over £6,515 per year. You'll also pay Class 4 NICs on your profits, which are calculated as a percentage of your earnings. You'll pay 9% on profits between £9,569 and £50,270 and 2% on profits over £50,270.

Value Added Tax (VAT)

Value Added Tax (VAT) is a consumption tax added to most goods and services in the UK. The standard rate of VAT is currently 20%, although there are also reduced rates of 5% and 0% for certain items such as food, children's clothes, and books.

If you're self-employed and your turnover is over £85,000 per year, you must register for VAT and charge it on your goods and services. You'll also be able to reclaim VAT on business expenses.

Capital Gains Tax

Capital Gains Tax (CGT) is a tax on the profits from selling assets such as property, shares, or other investments. If you're a UK resident, you'll be subject to CGT on any gains from selling assets worldwide. If you're a non-resident, you'll only be subject to CGT on gains from the sale of UK property.

The CGT allowance for the 2022/2023 tax year is £12,300, which means you won't pay any tax on the first £12,300 of gains. Any gains over this amount will be taxed at 10% or 20%, depending on your income tax band.

Inheritance Tax

Inheritance Tax (IHT) is a tax on the estate of someone who has passed away. If you're an expat with assets in the UK, your estate may be subject to IHT on those assets.

For the 2022/2023 tax year, the IHT threshold is £325,000, which means that any assets over this amount will be taxed at a rate of 40%. Some exemptions and reliefs are available, such as leaving assets to a spouse or civil partner or donating to charity.

How to pay taxes in the UK

If you're employed in the UK, your employer will deduct income tax and national insurance contributions from your pay and pay them to HMRC on your behalf. You'll receive a monthly pay slip showing how much tax and NICs you've paid.

If you're self-employed, you must complete a self-assessment tax return each year and pay any taxes you owe to HMRC. The deadline for submitting your tax return and paying any taxes owed is usually January 31st, following the end of the tax year.

It's important to keep accurate records of your income and expenses throughout the year to make completing your tax return easier. Consider hiring an accountant or tax advisor to help you navigate the UK tax system and ensure you're paying the right amount of tax.

If you are planning on moving to the UK, it is crucial to understand the tax system. By becoming familiar with the types of taxes, you will be required to pay, and how to pay them, you can ensure that you meet your tax obligations and avoid any penalties or fines. Be sure to keep accurate records, seek professional advice when necessary, and stay up to date with any changes to the tax system to make your transition to life in the UK as smooth as possible.

"Are you aware that HMRC can delve into your tax affairs for as long as 20 years under COP9 (Code of Practice 9) if they uncover unreported income? Failing to disclose all your income can result in severe consequences, including substantial fines and the possibility of legal action.

To avoid these risks, it's essential to make sure you've reported all your income to HMRC. This is not only an ethical approach, but it also protects your peace of mind and financial stability. HMRC's Disclosure Services can help you report your income, and the Worldwide Disclosure Facility is available for income earned abroad."