Individuals, including members of partnerships and limited liability partnerships as well as trustees may be liable to income tax.
A person who is a UK-resident is liable to income tax on their worldwide income. Income that is subject to tax in another country is still within the scope of UK tax although a credit for the tax paid should be available in the UK. The specific provisions of double taxation agreements should be considered.
Individuals who are not resident in the UK are generally liable to pay income tax on UK source income. UK source income may include earnings from employment as well as investment income.
Companies and other corporate bodies pay corporation tax instead.
Income tax is generally charged on:
- Earnings from employment
- Certain benefits provided by reason of employment (such as company cars)
- Profits from a trading activity undertaken by an individual or individuals in partnership
- Income on investments (dividends, interest and rental income)
- Pension income including state pension
- Social security benefits that replace income
Income tax will not be due on:
- Gains realised on the disposal of an asset which is within the scope of capital gains tax. Where assets are regularly bought and sold, the gains on those transactions may actually be profits arising from a trade.
- Inheritances and gifts
- Prize winnings
- Gambling winnings. However, where gambling is undertaken as a trading activity the proceeds may be subject to income tax.
- Compensation not linked to income.
- Social security benefits that do not replace income.
Income tax is charged for a tax year that runs from 6 April to the following 5 April.
If you are within the scope of income tax i.e. tax resident and in receipt of income, that income is subject to tax based on available reliefs and different bands for the rate of tax depending on the amount of income received.
Tax rates for 2020/21
|Band £||Rate %||Tax £||Cumulative tax £|
|0 to 37,500||20||7,500||7,500|
|37,501 to 150,000||40||45,000||52,500|
Most taxpayers are entitled to a personal allowance. For the tax year 2020-21 the personal allowance is £12,500 although it is reduced to nil for individuals with adjusted net incomes in excess of £100,000. The adjustment is £1 for every £2 of income over £100,000. Therefore, if adjusted net income exceeds £125,000, there is no personal allowance.
How do I transfer my personal allowance?
Since 2015/16 a spouse or civil partner who is not liable to income tax above the basic rate (20%) has been able to transfer an amount of their personal allowance to their spouse or civil partner provided the transferee is also not liable to income tax above the basic rate. The transferable marriage allowance for 2020-21 is £1,250.
The married couples allowance was withdrawn for 2000-01 onwards. However, it remains available for married couples or civil partners where one party was born before 6 April 1935. The relief is a reduction in income tax liability of the lower of 10% of the allowance (for 2020-21 £3,510) or the claimants total income tax liability. For marriages before 5 December 2005, the allowance is given to the husband unless a joint election has been made to be brought within the rules applying after that date.
Blind persons allowance is available for the registered blind for 2020-21 of £2,500.
For 2018-19 onward a dividend allowance has been available to all taxpayers. For 2020-21 the allowance is £2,000 to which a rate of 0% income tax applies. Dividends falling within the basic rate band (20%) are subject to a 7.5% rate of tax and those within the higher rate (40%), 32.5% and in the additional rate band (45%) 38.1%. Dividends form the top slice of income i.e. you cannot choose to have your dividends taxed within the basic rate band ahead of other income.
Personal savings allowance is available for basic rate (20%) and higher rate (40%) taxpayers although it is not available to additional rate taxpayers (45%). For basic rate taxpayers the allowance is £1,000 and for higher rate taxpayers the allowance is £500.
From 6 April 2017 a trading allowance £1,000 and a property allowance £1,000 are available to certain individuals. The allowances are not available on income of partners or close company participators or where rent a room relief is available. Where total receipts are £1,000 or less, the relief is given automatically. The income need not be declared.
Rent a room relief is available for annual rents from letting furnished accommodation in the only or main home. The relief for 2020-21 is up to £7,500 although is halved where some other person received income from letting accommodation in that property.
There are also certain investment reliefs:
- Community investment relief
- Enterprise investment relief
- Seed enterprise investment relief
- Social investment tax relief
- Venture capital trusts
- Individual savings accounts
An investment made by an individual in an accredited community development finance institution are eligible for relief up to 25%. The investment may be a loan or subscription for shares. The relief may be claimed for the current and previous four tax years.
The enterprise investment scheme applies to investments in shares in qualifying unquoted UK trading companies. The shares must be held for at least three years. Where the company is a ‘knowledge intensive company’ the maximum investment on which relief is available is £2m and where it is not knowledge intensive, £1m. Relief may be carried back unrestricted (subject to the annual maximum) to the preceding tax year. The rate of relief is 30%. Where gains are made it is possible to claim reinvestment relief for capital gains tax purposes. Any gains on the disposal of shares in a qualifying company where income tax relief has not been withdrawn are exempt for capital gains tax purposes.
Seed enterprise investment relief applies to investments in companies with fewer than 25 employees and assets of up to £200,000 carrying on or preparing to carry on new business. The shares must be held for at least three years. The maximum investment is £100,000 and the relief may be carried back for up to one year. The rate of relief is 50%. Where gains are made it is possible to claim reinvestment relief for capital gains tax purposes. Any gains on the disposal of shares in a qualifying company where income tax relief has not been withdrawn are exempt for capital gains tax purposes.
Income tax relief is available to both UK tax residents and non-residents who subscribe for qualifying shares or make qualifying debt investments in a qualifying social enterprise. The investment must be held for at least three years. The maximum investment for 2020-21 is £1m although may be carried back unrestricted to the preceding tax year. The rate of relief is 30% and given as a deduction against an income tax liability.
An individual subscribing for ordinary shares in a venture capital trust (VCT) obtains relief up to a maximum investment of £200,000 at 30% for 2020-21. The shares must be held for five years and if still qualifying VCT at that time, any gain on a subsequent disposal is exempt for capital gains tax (CGT) purposes.
Individuals can save within an Individual Savings Account (ISA) up to £20,000 for 2020-21. The income and gains within that ISA are not taxable and similarly no relief is available for any losses realised within the ISA.
There are also Lifetime ISA’s which are available for individuals aged between 18 and 40 permitting savings of up to £4,000 per annum and receiving a 25% bonus from the government. The funds can be used to buy a first home up to the value of £450,000 any time after 12 months from opening the account. The funds can be withdrawn tax free after age 60 for the purposes of retirement. Those that set up a help to buy ISA between 1 December 2015 and 30 November 2019 can continue to make contributions to them up to 30 November 2029 – the maximum monthly saving amount is £200.
An individual may make unlimited pension contributions although tax relief on contributions is restricted to the higher of relevant earnings or £3,600 provided the scheme operates tax relief at source. Contributions are also subject to the annual allowance, which is £40,000. Unused annual allowance may be carried forward three years. The annual allowance is subject to a tapered reduction for individuals with an adjusted income over £240,000 (for 2020-21). The reduction is £1 for every £2 over the limit. Adjusted income includes pension contributions. Regulated pensions are not subject to tax on their investments. The maximum tax-free lump sum that may be paid to a member on or after attaining the age of 55 is the lower of 25% of the pension rights or the lifetime allowance. The lifetime allowance for 2020-21 is £1,073,100.