Taxation in the United Kingdom
In the United Kingdom, taxation may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2023–24, total government revenue was forecast to be £1,139.1 billion, or 40.9 per cent of GDP, with income taxes and National Insurance contributions standing at around £470 billion.
History
A uniform Land Tax, originally introduced in England during the late 17th century, formed the main source of government revenue throughout the 18th century and the early 19th century.Napoleonic wars
Income tax was announced in Britain by William Pitt the Younger in his budget of December 1798 and introduced in 1799, to pay for weapons and equipment in preparation for the Napoleonic Wars. Pitt's new graduated income tax began at a levy of 2 old pence in the pound on annual incomes over £60, and increased up to a maximum of 2 shillings on annual incomes of over £200. Pitt hoped that the new income tax would raise £10 million, but receipts for 1799 totalled just over £6 million.Income tax was levied under five schedules. Income not falling within those schedules was not taxed. The schedules were:
- Schedule A
- Schedule B
- Schedule C
- Schedule D
- Schedule E
Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo.
Considerable controversy was aroused by the malt, house, windows and income taxes. The malt tax was easy to collect from brewers; even after it was reduced in 1822, it produced over 10 per cent of government's annual revenues through the 1840s. The house tax mostly hit London town houses; the windows tax mostly hit country manors.
Peel's income tax
The income tax was reintroduced by Sir Robert Peel in the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax of 7d in the pound, based on Addington's model, was imposed on annual incomes above £150.Provisional Collection of Taxes Acts
The Provisional Collection of Taxes Act 1913, replaced later by the Provisional Collection of Taxes Act 1968, authorised collection of taxes on the basis of a Budget resolution passed by the House of Commons, in advance of subsequent legislation implementing the budget.First World War
The war was financed by borrowing large sums at home and abroad, by new taxes, and by inflation. It was implicitly financed by postponing maintenance and repair, and canceling capital expenditure. The government avoided indirect taxes because they raised the cost of living, and caused discontent among the working class. There was a strong emphasis on being "fair" and being "scientific". The public generally supported the heavy new taxes, with minimal complaints. The Treasury rejected proposals for a stiff capital levy, which the Labour Party wanted to use to weaken the capitalists. Instead, there was an excess profits tax, of 50% on profits above the normal pre-war level; the rate was raised to 80% in 1917. Excise taxes were added on luxury imports such as automobiles, clocks and watches. There was no sales tax or value added tax. The main increase in revenue came from the income tax, which in 1915 went up to 3s. 6d in the pound, and individual exemptions were lowered. The income tax rate increased to 5s. in 1916, and 6s. in 1918. Altogether, taxes provided at most 30% of national expenditure, with the rest from borrowing. The national debt soared from £625 million to £7,800 million. Government bonds typically paid 5% p.a. Inflation escalated so that the pound in 1919 purchased only a third of the basket it had purchased in 1914. Wages were laggard, and the poor and retired were especially hard hit.Modern rules
Britain's income tax has changed over the years. Originally it taxed a person's income regardless of who was beneficially entitled to that income, but now tax is paid on income to which the taxpayer is beneficially entitled.Most companies were taken out of the income tax net in 1965 when corporation tax was introduced. These changes were consolidated by the Income and Corporation Taxes Act 1970.
Also the schedules under which tax is levied have changed. Schedule B was abolished in 1988, and Schedule C in 1996. For income tax purposes, the remaining schedules were superseded by the Income Tax Act 2003, which repealed Schedule E, and the Income Tax Act 2005, which also repealed Schedule F. For corporation tax purposes, the Schedular system was repealed and superseded by the Corporation Tax Acts of 2009 and 2010.
The highest rate of income tax peaked in the Second World War at 99.25%. This was slightly reduced after the war and was around 97.5 per cent through the 1950s and 1960s.File:U.K.-Tax-Revenues-As-GDP-Percentage-.jpg|thumb|right|350px|Tax revenues as a percentage of GDP for the UK in comparison to the OECD and the EU 15
In 1971, the top rate of income tax on earned income was cut to 75%. A surcharge of 15% on investment income kept the overall top rate on that income at 90%. In 1974 the top tax rate on earned income was again raised, to 83%. With the investment income surcharge this raised the overall top rate on investment income to 98%, the highest permanent rate since the war. This applied to incomes over £20,000. In 1974, around 750,000 people paid the higher rate of income tax.
Margaret Thatcher, who favoured indirect taxation, reduced personal income tax rates during the 1980s. In the first budget after her election victory in 1979, the top rate was reduced from 83% to 60% and the basic rate from 33% to 30%. The basic rate was further cut in three subsequent budgets, to 29% in 1986 budget, 27% in 1987 and 25% in 1988. The top rate of income tax was cut to 40% in the 1988 budget. The investment income surcharge was abolished in 1985.
Subsequent governments reduced the basic rate further, to the present level of 20% in 2007. Since 1976, the basic rate has been reduced by 15 percentage points, but this reduction has been largely offset by increases in national insurance contributions and value added tax.
In 2010 a new top rate of 50% was introduced on income over £150,000. The then opposition Conservative party claimed that this policy caused a decrease in revenue to the Exchequer, by incentivizing tax-avoidance or emigration/offshoring.
In the 2012 budget this rate was cut to 45% for 2013–14. The Budget Red Book showed an Office for Budget Responsibility prediction that the rate cut would be a net cost to the treasury of around £100 million per year The outturn was an £8 billion increase in the tax paid by additional rate taxpayers from £38 billion to £46 billion. Chancellor George Osborne said that the lower, more competitive tax rate had caused the increase.
The OBR has discussed the successive changes in tax take drawing attention to complications from "forestalling" and "income-shifting". They also discuss systemic reasons for the tax falling in the first instance, but say "It is too early to provide a meaningful reassessment of the costing of the reduction."
In September 2022 chancellor, Kwazi Kwarteng, announced that from April 2023 the top rate of tax would be 40% and the basic rate 19%, as part of what was referred to as a "Growth Plan". After the collapse of the Truss government, the changes were cancelled.
HMRC has published online a comprehensive set of manuals about the UK tax system.
Overview
forms the single largest source of revenues collected by the government. The second largest source of government revenue is National Insurance Contributions. The third largest source of government revenues is value added tax, and the fourth-largest is corporation tax.Residence and domicile
United Kingdom source income is generally subject to UK taxation whatever the citizenship and place of residence of an individual, or the place of registration of a company. This means that the UK income tax liability of an individual who is neither resident nor ordinarily resident in the United Kingdom is limited to any tax deducted at source on UK income, together with tax on income from a trade or profession carried on through a permanent establishment in the UK and tax on rental income from UK real estate.People who are both resident and domiciled in the United Kingdom are additionally liable to taxation on their worldwide income and gains. For people resident but not domiciled in the United Kingdom, foreign income and gains have historically been taxed on the remittance basis, that is to say, only income and gains remitted to the United Kingdom are taxed. From 6 April 2008, a long-term non-dom wishing to retain the remittance basis is required to pay an annual tax of £30,000. Since 6 April 2017, non-doms who have been resident in the UK for 15 out of the last 20 tax years lose their non-dom status and become liable for tax on worldwide income and capital gains, and their worldwide assets become subject to inheritance tax on death.
UK-domiciled people who are not resident for three consecutive tax years are not liable for UK tax on their worldwide income, and those who are not resident for five consecutive tax years are not liable for UK tax on their worldwide capital gains.Those looking to get tax paid gross, if not-UK resident can apply for a NT code. This is a tax code issued by HMRC to individuals living outside the UK. It is available to those who receive taxable UK income but are entitled to have their income paid without UK tax deductions due to a Double Taxation Agreement between the UK and their country of residence. Anyone physically present in the UK for 183 or more days in a tax year is classed as resident for that year.
Domicile is a term with a technical meaning. Essentially a person is domiciled in the United Kingdom if the UK is deemed to be their permanent home. A British citizen may be accepted by the tax authorities as non-domiciled in the UK, but being born in another country, or in Britain to a non-domiciled father, facilitates non-dom status.
A company is resident in the United Kingdom if it is incorporated there or if its central management and control are there.
Double taxation of income and capital gains may be avoided by an applicable double tax treaty; the United Kingdom has one of the largest networks of treaties of any country.