The UK tax system

 UK taxation is a complex and dynamic topic that affects individuals, businesses, and organisations in various ways. In this blog post, I will provide an overview of some of the key aspects of UK taxation, such as the tax system, the tax rates, the tax reliefs, and the tax challenges for 2024.

The UK tax system is based on the principle of self-assessment, which means that taxpayers are responsible for reporting and paying their own taxes to the HM Revenue and Customs (HMRC), the UK’s tax authority. The UK tax year runs from 6 April to 5 April of the following year, and taxpayers have to file their tax returns and pay their taxes by 31 January after the end of the tax year.

The UK tax system consists of various types of taxes, such as:

• Income tax: This is a tax on the income of individuals, such as wages, salaries, pensions, dividends, interest, and rental income. The income tax rates for 2024 are 20% for the basic rate, 40% for the higher rate, and 45% for the additional rate. The income tax thresholds for 2024 are £12,570 for the personal allowance, £37,700 for the basic rate band, £150,000 for the higher rate band, and no limit for the additional rate band. There are also different income tax rates and thresholds for Scotland and Wales.
• Corporation tax: This is a tax on the profits of companies and other organisations. The corporation tax rate for 2024 is 19%, but it will increase to 25% from 1 April 2025 for companies with profits over £250,000. There will also be a small profits rate of 19% for companies with profits under £50,000, and a tapering relief for companies with profits between £50,000 and £250,000.
• Value added tax (VAT): This is a tax on the consumption of goods and services. The standard VAT rate for 2024 is 20%, but there are also reduced rates of 5% and 0% for certain items, such as domestic fuel, children’s clothing, books, and food. Businesses have to register for VAT if their taxable turnover exceeds £85,000 in a 12-month period, and they have to charge VAT on their sales and reclaim VAT on their purchases.
• Capital gains tax (CGT): This is a tax on the increase in value of assets, such as property, shares, or business assets, when they are sold or transferred. The CGT rates for 2024 are 10% for the basic rate and 20% for the higher and additional rates for most assets, and 18% for the basic rate and 28% for the higher and additional rates for residential property. The CGT annual exempt amount for 2024 is £12,300 for individuals and £6,150 for trusts.
• Inheritance tax (IHT): This is a tax on the transfer of wealth, such as money, property, or gifts, when someone dies or gives away assets during their lifetime. The IHT rate for 2024 is 40% for the amount above the nil-rate band of £325,000, but there are also various reliefs and exemptions, such as the spouse or civil partner exemption, the residence nil-rate band, the charitable gifts exemption, and the business property relief.

The UK tax reliefs

The UK tax system also offers various reliefs and allowances to reduce the tax liability of taxpayers, such as:

• Pension contributions: Individuals can contribute up to 100% of their earnings or £40,000, whichever is lower, to a registered pension scheme and receive tax relief at their marginal rate of income tax. There is also a lifetime allowance of £1,073,100 for the total value of pension savings, and any excess is subject to a tax charge of 25% or 55%, depending on how the excess is taken.
• ISAs: Individuals can save up to £20,000 per year in an individual savings account (ISA) and receive tax-free interest, dividends, and capital gains. There are different types of ISAs, such as cash ISAs, stocks and shares ISAs, lifetime ISAs, and innovative finance ISAs.
• EIS and SEIS: Individuals can invest in eligible start-ups and small businesses through the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS) and receive income tax relief of 30% and 50%, respectively, on their investments, up to £1 million and £100,000 per year, respectively. They can also defer or eliminate CGT on their investments, and claim loss relief if the investments fail.
• R&D tax credits: Companies can claim tax relief for their research and development (R&D) activities, either by reducing their corporation tax liability or receiving a cash payment. The R&D tax credit rates for 2024 are 12% for the research and development expenditure credit (RDEC) for large companies, and 230% for the small and medium-sized enterprises (SME) scheme for small and medium-sized companies.

The UK tax challenges for 2024

The UK tax system faces various challenges and uncertainties for 2024, such as:

• The impact of Brexit: The UK’s departure from the European Union (EU) has implications for the UK’s trade, customs, VAT, and tax treaties with the EU and other countries. The UK and the EU have agreed on a trade and cooperation agreement (TCA) that covers some of the key issues, such as tariff-free and quota-free trade, rules of origin, and dispute resolution, but there are still many areas that need further clarification and negotiation, such as financial services, data protection, and digital taxation.
• The impact of COVID-19: The UK’s response to the coronavirus pandemic has resulted in unprecedented levels of public spending, borrowing, and debt, which pose significant challenges for the UK’s fiscal sustainability and economic recovery. The UK government has introduced various measures to support individuals and businesses affected by the pandemic, such as the furlough scheme, the self-employment income support scheme, the bounce back loan scheme, and the business rates relief, but these measures also have implications for the UK’s tax revenues and compliance risks.
• The impact of digitalisation: The UK’s digital economy and society have grown rapidly in recent years, creating new opportunities and challenges for the UK’s tax system. The UK has introduced a digital services tax (DST) of 2% on the revenues of certain online platforms that derive value from UK users, such as social media, search engines, and online marketplaces, but this is a temporary measure until a global solution is reached. The UK is also participating in the OECD’s inclusive framework on base erosion and profit shifting (BEPS), which aims to address the tax challenges arising from the digitalisation of the economy, such as the allocation of taxing rights, the minimum effective tax rate, and the dispute resolution mechanisms.

Conclusion

UK taxation is a complex and dynamic topic that affects individuals, businesses, and organisations in various ways. In this blog post, I have provided an overview of some of the key aspects of UK taxation, such as the tax system, the tax rates, the tax reliefs, and the tax challenges for 2024. I hope you have found this blog post informative and useful. If you have any questions or comments, please feel free to contact me. Thank you for reading. 😊