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The tax system collects money from individuals, businesses, and other entities so the government can function properly. To meet the tax obligations and make informed financial decisions, it’s crucial for individuals and businesses to understand the UK tax system. You can optimize your finances and manage your tax affairs if you know what kinds of taxes, tax bands, allowances, and tax planning strategies you need.

In the UK, taxes are the primary source of revenue for government services and expenditures. Revenue generated from taxes pays for essential public services like healthcare, education, infrastructure, transportation, and law enforcement. These services are vital to maintaining society’s well-being and functioning. Also, taxes fund social welfare benefits aimed at helping the poor and vulnerable. For example, welfare assistance, unemployment benefits, housing support, disability benefits, and retirement pensions are funded. By imposing higher taxes on people with higher incomes or wealth, taxation helps redistributing wealth within society. Taxes in the UK are administered by HM Revenue & Customs (HMRC), which is responsible for collecting taxes, enforcing tax laws, and providing guidance and support to taxpayers.

The UK tax year runs from April 6th to April 5th the following year and you are required to file a tax return and pay any tax owed by specific deadlines, usually in January following the end of the tax year. For example, for the tax year ending on April 5, 2024, the tax return deadline would be January 31, 2025. It’s important to note that this deadline applies to most taxpayers, including those who file online or by paper. However, if you’re filing your tax return for the first time or if you want HM Revenue & Customs (HMRC) to collect tax through your tax code, you may need to submit your tax return earlier, typically by October 31st following the end of the tax year. It’s essential to be aware of the specific deadlines and requirements for your individual circumstances to avoid penalties for late filing.

It’s possible for individuals to file several types of taxes in the United Kingdom. Individuals can identify their tax obligations and ensure compliance with applicable tax laws and regulations by understanding various types of taxes in the UK and considering their sources of income, assets, and employment status. Based on individual circumstances and sources of income, the main groups of people that file tax in the UK are:

Employees: Individuals who are employed by a company or organization typically have taxes deducted from their salary through the Pay As You Earn (PAYE) system.
Self-Employed Individuals: Self-employed individuals who run their own businesses, work as freelancers, or provide services as sole traders are required to file tax returns and pay taxes on their business profits. They must report their income and expenses to HM Revenue & Customs (HMRC) through a self-assessment tax return.
Landlords: Individuals who own rental properties and receive rental income are required to declare this income to HMRC and pay tax on their rental profits.
Company Directors: Directors of limited companies have specific tax obligations, including filing annual accounts and corporation tax returns for their company. They may also need to report personal income from the company, such as salaries, dividends, or benefits in kind, on their personal tax return.
Investors: Individuals who earn income from investments, such as dividends from shares, interest from savings accounts, or capital gains from selling assets, may need to report this income to HMRC and pay tax on it.
Pensioners: Retired individuals who receive income from pensions, annuities, or other retirement benefits may need to report this income to HMRC and pay tax on it.
High Earners: Individuals with high incomes may fall into higher tax brackets and may have additional tax obligations, such as paying higher rates of income tax or contributing to additional taxes like the High-Income Child Benefit Charge or the Annual Tax on Enveloped Dwellings (ATED).
Non-Residents: Individuals who are not resident in the UK but have UK income, such as rental income from UK properties or income from UK investments, may still have tax obligations in the UK and may need to file a non-resident tax return.

The different factors one could consider identifying the type of tax a person has to file are:

Review Sources of Income and Assets: Individuals should assess their sources of income, including employment income, investment earnings, rental income, and other sources, to determine if they are subject to income tax, CGT, or other taxes.
Understand Employment Status: Different tax obligations may apply depending on an individual’s employment status, such as being employed, self-employed, or a company director. Understanding one’s employment status can help determine tax filing requirements.
Review Property Ownership: Property owners should be aware of their obligations regarding council tax, SDLT, and potentially CGT upon the sale of property. Understanding the tax implications of property ownership can help individuals comply with their tax obligations.
Consult HM Revenue & Customs (HMRC): HMRC provides guidance and resources to help taxpayers understand their tax obligations and filing requirements. Individuals can visit the HMRC website or contact HMRC directly for assistance with tax-related queries.

Most of the taxes come from three main sources of tax type:

Income Tax: Income tax is the tax on income earned by individuals, including wages, salaries, pensions, and rental income. It is calculated based on taxable income and is subject to different tax bands and rates.
National Insurance Contributions (NICs): NICs are contributions paid by individuals and employers to fund state benefits, including the state pension and healthcare. NICs are based on earnings and are collected alongside income tax.
Value Added Tax (VAT): VAT is a consumption tax levied on the sale of goods and services.

The further categories of tax type are:

Corporation Tax: Corporation tax is imposed on the profits of UK-resident companies and non-UK companies with a permanent establishment in the UK.
Capital Gains Tax (CGT): CGT is imposed on the profit earned from the sale of assets, such as property, stocks, and other investments. Individuals are required to report capital gains and pay tax on the gain above the annual exempt amount.
Inheritance Tax (IHT): Inheritance tax is levied on the value of an individual’s estate upon their death.
Stamp Duty Land Tax (SDLT): SDLT is payable on the purchase of land and property in England and Northern Ireland above certain thresholds.
Council Tax: Council tax is a local tax collected by local authorities to fund services such as schools, waste collection, and policing.
Business Rates: Business rates are a tax on non-domestic properties, such as shops, offices, and warehouses. They are paid by the occupiers or owners of the properties and are calculated based on the rateable value of the property.
Customs Duties and Import Taxes: Customs duties and import taxes are levied on goods imported into the UK from other countries. They are typically paid by the importer and are calculated based on the value of the goods and their classification under the UK’s customs tariff.
Car, Road, and Airport Taxes: In the UK, taxes related to cars, roads, and airports fall under various categories and are designed to fund infrastructure, maintenance, and environmental initiatives. The different categories of tax applicable under this tax type are Vehicle Excise Duty (VED) or Road tax, Fuel Duty, Vehicle Insurance Premium Tax (IPT), Congestion Charge, Vehicle Registration Tax (VRT), and Airport Passenger Duty (APD). These taxes play a vital role in funding transportation infrastructure, environmental initiatives, and public services in the UK while also promoting sustainable travel practices and reducing environmental impact.

If you need help navigating the tax system and filing taxes, you can also talk to an accountant or tax advisor.

Tax bands and allowances play a significant role in determining the amount of tax individuals are required to pay on their income. To calculate your taxable income, subtract any allowable deductions, reliefs, and allowances (such as personal allowances, pension contributions and charitable donations) from your total income. The remaining amount is your taxable income, which is then subject to income tax at the applicable rates.

To understand in depth about the tax bands and allowances in the UK, click here.

Income tax is a fundamental aspect of the UK’s tax system, impacting both individuals and businesses. Read through this post to enhance your understanding on income tax bands, allowances, rates, and how to calculate income tax liability for individuals and businesses.

Let’s delve into the intricacies of tax bands and explore the various tax types that shape the UK’s fiscal landscape. These rates are as for the year 2024-2025.

Income Tax: Income Tax is the tax on income earned by individuals, including wages, salaries, pensions, and rental income. It is calculated based on taxable income and is subject to different tax bands and rates. Income tax is applied on individual’s earnings above certain threshold. The tax band based on individual’s income is:

#	Main Rates	Income Tax Rate	Income tax band	Note
1	Personal Allowance	0%	Upto £12,570	Tax-free income. One can increase allowed personal allowance by claiming Marriage or Blind person allowances (if eligible).
2	Basic Rate	20%	£12,570 to £50,270
3	Higher Rate	40%	£50,270 to £125,140	Allowed Personal allowance decrases, if taxable income over £100,000
4	Additional Rate	45%	Above £125,140	Allowed Personal allowance is zero, if taxable income over £125,140

National Insurance Contributions (NICs): NICs are contributions paid by individuals and employers to fund state benefits, including the state pension and healthcare. NICs are based on earnings and are collected alongside income tax. There are 4 main types of classes in NICs.

#	Classes	Sub-class	Description	NIC Rate
1	Class 1	Primary Class 1	Contribution made by employees based on their earnings.	Earnings < £9,880 per year are not subject to NICs. Earnings between £9,881 and £50,270 per year are subject to NICs at the primary threshold rate of 8%. Earnings above £50,270 per year are subject to NICs at the higher rate of 2%.
1	Class 1	Secondary Class 1	Contributions made by employers based on their employees’ earnings.	Employers are required to pay NICs at the secondary threshold rate of 13.8% on earnings above £9,880 per year.
2	Class 2		Contributions paid by self-employed individuals who earn above a certain threshold.	Self-employed individuals with earnings above £6,515 are required to pay Class 2 NICs at a flat weekly rate.
3	Class 3		Voluntary contributions paid by individuals to fill gaps in their National Insurance record, such as when they are not working or earning below the threshold for paying NICs.
4	Class 4		Contributions paid by self-employed individuals based on their profits.	Profits between £9,880 and £50,270 per year are subject to NICs at the main rate of 9%. Profits above £50,270 per year are subject to NICs at the additional rate of 2%.

Read through the post to gain more insight on how to register for NIC and NIC category letters.

Value Added Tax (VAT): VAT is a consumption tax levied on the sale of goods and services. There are three main VAT rates:

#	Rates	% of VAT Rate	Rate Applies to
1	Standard Rate	20%	Most goods and services, including electronics, clothing, furniture, and professional services like consulting and accounting.
2	Reduced Rate	5%	Certain essentials such as children’s car seats, domestic fuel and power, and renovations to residential properties.
3	Zero Rate	0%	Most food and drink (excluding alcohol and certain luxury items), books and newspapers, certain financial and insurance services, public transport fares, and prescription medications.

Note: Businesses that are registered for VAT must charge the appropriate rate of VAT on their sales, collect VAT from their customers, and pay this VAT to HM Revenue & Customs (HMRC) through regular VAT returns. Conversely, businesses can reclaim VAT on their purchases and expenses, reducing their overall VAT liability.

Read through this post to understand who and under what circumstances one should file VAT tax.

Corporation Tax: Corporation tax is imposed on the profits of UK-resident companies and non-UK companies with a permanent establishment in the UK.

#	Rates	Tax Rate	Who will fall under this category?
1	Small Profit Rates	19%	Companies with profits under £50,000.
2	Main Rate	25%	Companies with profits over £250,000.
3	Marginal Relief	Pay tax at Main rate, reduced by a marginal relief.	Companies with profits between £50,000 and £250,000.

Different cooperation tax rate is applied to companies that make profits from oil extractions or oil rights in the UK, these are called ring fence companies. Learn more on this.

Read through the post to learn more about the marginal relief and who can claim it.

Companies can deduct certain capital expenditures, known as capital allowances, from their taxable profits before calculating corporation tax. Capital allowances may include expenses for machinery, equipment, vehicles, and certain types of building renovations.

Loss Relief: Companies can carry forward losses from previous years to offset against future profits, reducing their corporation tax liability. Loss relief can help companies manage their tax liabilities during periods of financial difficulty.

Capital Gains Tax (CGT): CGT is imposed on the profit earned from the sale of assets, such as property, stocks, and other investments. Individuals are required to report capital gains and pay tax on the gain above the annual exempt amount. Capital gains above the annual exempt amount (£3,000) are subject to CGT at various rates depending on the individual’s income tax band.
1. 10% for basic rate taxpayers.
2. 20% for most assets for individuals at higher rate and additional rate taxpayers.
3. 28% for residential property and carried interest (profits from certain types of investment funds) for individuals at higher rate and additional rate taxpayers.
4. Additional rate taxpayers, those with taxable income above the additional rate threshold, may pay capital gains tax at the higher rate of 28% for most assets and 36% for residential property and carried interest.

Read the post to gain insight on CGT reliefs and taxable amount calculations.

Inheritance Tax (IHT): Inheritance tax is levied on the value of an individual’s estate upon their death.

#	Rates	Threshold value	Tax Rate	Who will fall under this category?
1	Nil Rate Band	£325,000	0%	No tax if value of estate asset is below the threshold or If you leave everything above the threshold to your spouse, civil partner, a charity, or a community amateur sports club
2	Residence Nil Rate Band	£500,000	0%	If you leave your main residence to the direct descendants (e.g., children or grandchildren), then no tax below the threshold value.
3	Inheritance Tax Rate		40%	Applicable on the value of the taxable estate above the eligible threshold.
3	Inheritance Tax Rate		36%	If you leave 10% or more of the ‘net value’ to charity in your will.

Taxable Estate Calculation: The taxable estate is calculated by adding up the value of all assets owned by the deceased, including property, investments, savings, and personal possessions. Any liabilities, debts, funeral expenses, and certain exemptions or reliefs can be deducted from the total value of the estate to arrive at the taxable estate.

However, certain gifts made during the deceased’s lifetime may be subject to lower rates or exemptions, depending on when the gifts were made and to whom they were given. Learn more about exemptions you could apply for inherited estates.

Council Tax: Council tax is a local tax collected by local authorities to fund services such as schools, waste collection, and policing. Council Tax bands are labelled from A to H (and sometimes I or J in Wales), with B and A representing properties with the lowest value and H representing properties with the highest value. Each band corresponds to a specific range of property values.
1. Certain properties may be eligible for discounts or exemptions from Council Tax. For example, single occupants may be entitled to a 25% discount on their Council Tax bill. Other exemptions may apply to properties occupied by full-time students, certain disabled persons, or properties that are unoccupied and undergoing major repairs.
2. Council Tax Support: Low-income households may be eligible for Council Tax Support, which provides financial assistance to help with Council Tax payments.

Explore through the post to understand more about various exemptions you could look for Council tax.

Stamp Duty Land Tax (SDLT): SDLT is payable on the purchase of land and property in England and Northern Ireland above certain thresholds.

#	Rates	Rate Band	Tax Rate	Who will fall under this category?
1	Standard Residential Property Rates	Zero-Rate Band	0%	No tax if value of property price is below £250,000.
		Higher Rate Band	5%	Portion of the property price above £250,000 and up to £925,000
		Additional Rate Band	10%	Portion of the property price above £925,000 and up to £1.5 million
			12%	Portion of the property price above £1.5 million
		First-Time Buyer Relief		0% up to £425,000 5% on the portion of the property price above £425,001 and up to £625,000 No exemption if property is above £625,000.
2	Additional Property Rate		3% higher than the standard rates for each band.	Purchases of additional residential properties, such as second homes and buy-to-let properties.
3	Commercial Property Rates			Rates vary depending on the purchase price and the nature of the property.

There are various exceptions, reliefs, and exemptions available for certain types of property transactions, such as transfers between spouses or civil partners, purchases of agricultural land, and transactions involving charities or public bodies. Read through the post to learn more on the same.

Individuals or businesses can apply for tax credits and reliefs. Read through the post to learn more about the various options available under tax credits and reliefs.

NICs are contributions paid by individuals and employers to fund state benefits, including the state pension and healthcare. You need to apply for National Insurance number to start paying National Insurance Contributions. National Insurance number never changes and could be found in your Payslip, P60 form, tax letter, pension letter, or benefits letter. Keep it safe to avoid any fraudulent.

You must pay National Insurance, when:

You are 16 or older, and
An employee earning more than £242/week from one job or self-employed and making a benefit of more than £12,570/year.

Apply for National Insurance Number:

You can apply for NI if you live in the UK, or work in the UK, or is looking for a work in the UK. If you are 19 or under, HMRC sends you the NI number 3 months before your 16th birthday if you live in the UK and under your name Child benefits are availed by your parents or guardians. However, if you do not receive your NI between the age of 16-19, please apply for one by contacting the HMRC.

NICs are based on earnings and are collected alongside income tax. There are 4 main types of classes in NICs based on your employment status and how much you earn.

Class 1 : Further categorised as Class 1A and Class 1B –paid by employees’ salary and employer contribution on the basis of the employees’ salary falling under which band and employee’s NI category letter. To know in detail about how much you and your employer contributes for NI, refer to gov.uk category rate page.

If earning £123 – £242 per week from 1 job, you usually do not pay NI but still qualify for some state benefits.
If earning less than £123 a week from the job , you can choose to pay voluntary Class 3 contribution to cover gaps in NI record.

Class 2 : For self-employed individuals on their profits. You deduct the expenses incurred in the tax year from your self-employed income.

If profits are £6,725 or more in a year, but less than £12,570, you do not pay NI.
If profits are less than £6,725, you can pay voluntary Class 2 Contribution at a rate of £3.45 a week.
If profits are more than £12,570, you pay Class 4 Contribution.

#	Classes	Sub-class	Description	NIC Rate	Benefits
1	Class 1	Primary Class 1	Contribution made by employees based on their earnings.	Earnings < £9,880 per year are not subject to NICs. Earnings between £9,881 and £50,270 per year are subject to NICs at the primary threshold rate of 8%. Earnings above £50,270 per year are subject to NICs at the higher rate of 2%.	Basic State Pension Additional State Pension New State Pension New Style Jobseeker’s Allowance Contribution-based Employment and Support Allowance Maternity Allowance Bereavement Support Payment
1	Class 1	Secondary Class 1	Contributions made by employers based on their employees’ earnings.	Employers are required to pay NICs at the secondary threshold rate of 13.8% on earnings above £9,880 per year.
2	Class 2		Contributions paid by self-employed individuals who earn above a certain threshold.	Self-employed individuals with earnings above £6,515 are required to pay Class 2 NICs at a flat weekly rate. You will pay 6% on profits between £12,570 and £50,270. You will pay 2% on profits over £50,270.	Basic State Pension New State Pension Contribution-based Employment and Support Allowance Maternity Allowance Bereavement Support Payment
3	Class 3		Voluntary contributions paid by individuals to fill gaps in their National Insurance record, such as when they are not working or earning below the threshold for paying NICs.	Voluntary NIC is £17.45 a week. You can use only Direct Debit.	Basic State Pension New State Pension
4	Class 4		Contributions paid by self-employed individuals based on their profits.	Profits between £9,880 and £50,270 per year are subject to NICs at the main rate of 9%. Profits above £50,270 per year are subject to NICs at the additional rate of 2%.	No State Benefits.

Employees stop paying class 1 NI when they reach State Pension Age. Self-employed individual stop paying class 4 NI from 6 April after they reach State Pension Age. You can usually pay voluntary contributions for the past 6 years before 5 April of each year, like for the year 2023-24, you can make voluntary contribution until 5 April 2029.

What will happen if you do not pay NIC:

Your benefits gets affected if there’s a gap in your NI record. To avail the benefits individuals either pay:

Voluntary NI, or
Get credits if they cannot pay NI because they are unable to work due to illness or taking care of someone.

Exemptions or pay less NI:

You are married or widow with a valid ‘certificate of election’.
You are deferring NI because you have got more than one job.

Company Directors NI Contribution:

Company directors are considered as the company employee and will pay Class 1 NI. They will pay NI on salary and bonuses above £12,570 and contribution is calculated on annual earning rather than earned during each pay period. However, to file the NI there are two ways:

Standard Annual Earning period (AN) – Company uses payroll software to calculate director NI contribution.
Alternative Method (AL) – Company calculates NI at each pay period and at the end of tax year uses payroll software to calculate the net NI contribution by the director.

At the end of tax year company could report about the director NIC calculation method while submitting Full Payment Submission (FPS).

National Insurance Credits

Ensuring people have a future is a crucial role of National Insurance Credits as they contribute towards State Pension benefits and provides access to state support. It’s essential to know how to use and benefit from National Insurance Credits if you’re not working, ill or caring for someone. Utilizing these credits can help lay a groundwork, for your retirement and provide security in circumstances.

National Insurance Credits are available to individuals:

Looking for a job,
Unwell or disabled,
Maternity, Paternity or Adoption pay,
Parents or guardians,
Carers,
On Working Tax Credit,
On Universal Credit, or
Partners of people in Armed forces,

National Insurance Credits is not available to married woman who is paying reduced rate National Insurance.

Types of National Insurance Credit

There are three types of National Insurance Credit and individuals can apply for the credit based on their situation. These are namely:

Class 1 National Insurance Credits: Employed individuals with wage more than £123 and less than £242 per week are eligible for Class 1 NIC towards their State Pension.
Class 3 National Insurance Credits: Individuals who are not eligible for Class 1 or Class 2 contributions, choose to pay voluntary Class 3 contribution to fill the gaps in their National Insurance Record.
Class 3 National Insurance Credits for Carers: Individuals taking unpaid care of others for at least 20 hours per week as part of their responsibility are eligible for Class 3 National Insurance Credits for Carers to contribute towards their State Pension.

A person can be eligible for either of the above National Insurance Credits depending on their individual situation. Some of the situations and individual entitlement to the credit are explained below in a more detailed manner:

#	Scenario	Eligibility	Credits
1	Looking for work	You’re on Jobseeker’s Allowance, and Not in education employment, or working 16 hours or more a week	You get Class 1 credits automatically
1	Looking for work	You’re unemployed, and Looking for work, but not on Jobseeker’s Allowance	Contact your local Jobcentre to claim Class 1 credits
2	Unwell or disabled	You’re on Employment and Support Allowance (ESA), or Unemployability Supplement or Allowance	You get Class 1 credits automatically
		You’re not on Employment and Support Allowance but you satisfy the conditions for it	Apply for New Style ESA to get Class 1 credits
		You’re on Statutory Sick Pay, You do not earn enough to make a qualifying year	Apply for Class 1 credits.
3	Maternity, Paternity or Adoption pay	You’re on Maternity Allowance	You get Class 1 credits automatically
3	Maternity, Paternity or Adoption pay	You’re on Statutory Maternity, Paternity or Adoption Pay, or Additional Statutory Paternity Pay, and You do not earn enough to make a qualifying year	Apply for Class 1 credits.
4	Parents or guardians	You’re a parent or guardian registered for Child Benefit for a child under 12	You get Class 3 credits automatically
		You want to transfer credits from a spouse or partner who got Child Benefit for a child under 12	Apply to transfer Class 3 credits between parents or guardians
		You’re a foster carer, or a kinship carer in Scotland	Apply for Class 3 credits
5	Carers	You’re getting Carer’s Allowance payments or (in Scotland only) Carer Support Payment	You get Class 1 credits automatically
		You’re on Income Support and providing regular and substantial care	You get Class 3 credits automatically
		You’re caring for one or more sick or disabled person for at least 20 hours a week	Apply for Class 3 carer’s credits if you’re not on Carer’s Allowance, Carer Support Payment, or Income Support
6	On Working Tax Credit	You get Working Tax Credit with a disability premium, and You are an employed earner with earnings below £6,396 or have profits of less than £6,725 if you’re self-employed	You may get Class 1 credits automatically.
		You get Working Tax Credit without a disability premium, You are an employed earner with earnings below £6,396 or have profits of less than £6,725 if you’re self-employed	You may get Class 3 credits automatically.
		You and your partner get Working Tax Credit – only one of you will get Class 3 credits	You may get Class 3 credits automatically.
7	On Universal Credit		you get Class 3 credits automatically
8	Partners of people in Armed forces	You’re married to or a civil partner of a member of the armed forces, went with your partner on an overseas posting after 6 April 2010, and are returning to the UK	Apply for Class 1 credits
8	Partners of people in Armed forces	You’re married to or a civil partner of a member of the armed forces, went with your partner on an overseas posting after 6 April 1975, reach state pension age on or after 6 April 2016, and are not getting Class 1 credits	Apply for Class 3 credits

The purpose of trust is to manage assets such as money, investments, land, and buildings; some common reasons for trusts being set up include controlling family assets, passing on assets to a beneficiary while you are alive or deceased, and having control over family assets. Trusts are characterized by the settlor (the individual who places the assets on trust), the trustee (the individual who manages the trust), and the beneficiary (the individual who receives benefits from the trust). Trust deeds are drafted by the settlor and specify how assets in a trust should be used. Trustees manage trusts and deal with trust assets daily as per trust deed. Beneficiaries can be one or more and they may receive income from the trust, capital from the trust, or both.

There are different types of trust, and you pay tax differently for each one of them.

Bare Trust

In this trust, assets are kept under trustee and handed over to beneficiary once they reach the age threshold (18 years in England or Wales, and16 years in Scotland).

Beneficiary is responsible for paying tax on the income received.

No Capital Gains Tax if assets are transferred to the beneficiary.

No Inheritance Tax if the person who has transferred the assets lives for 7 years after the transfer. However, if the person dies before 7 years, then extra 20% inheritance tax must be paid.

Discretionary trusts

In this trust, Trustee can make utilisation decisions on trust income and capital income. Referencing to trust deed, trustee can make decision on what gets paid out, which beneficiary to receive payment, frequency of payment, and special condition to impose on beneficiary.

Trustees pay tax and they do not qualify for dividend allowance, hence pay tax on all the dividend income.

Tax-Rate that trustee pays:

Income	Dividend tax rate	Tax rate on Rest of the income
First £1,000	8.75%	20%
Above £1,000	39.35	45%

When the Settlor has more than one trust, the £1,000 will be divided by the number of trusts the Settlor has. If the number of trusts exceeds five, then the £200 income will be taxed at 20%.

Interest in possession trusts

In this, trustee must pass all the income from trust to the beneficiary.

Tax-Rate that trustee pays:

Income	Dividend tax rate	Tax rate on Rest of the income
First £1,000	8.75%	20%

If trustee passes income directly to the beneficiary, then beneficiary should file self-assessment tax return on the income received.

Capital Gains Tax:

No Capital Gains tax if someone dies and assets are transferred to someone else.

Inheritance Tax:

Beneficiary must pay 10-yearly Inheritance tax on the assets transferred after 22 March 2006. However, if you have inherited the asset after someone died, then no 10-year anniversary inheritance tax. But a 40% tax will be applicable when you die.

No inheritance tax if the assets stay in the trust in the interest of beneficiary.

Accumulation trusts

In this, trustees can accumulate income within the trust and add it to the trust’s capital.

Trustees pay tax and they do not qualify for dividend allowance, hence pay tax on all the dividend income.

Tax-Rate that trustee pays:

Income	Dividend tax rate	Tax rate on Rest of the income
First £1,000	8.75%	20%
Above £1,000	39.35	45%

Settlor-interested trusts

In this trust, the settlor retains an interest in the trust assets or income, directly or indirectly. Settlor or their spouse or civil partner benefits from this trust. The trust can be Discretionary trusts, Accumulation trusts, or Interest in possession trusts.

Settlor is responsible for declaring and paying the income tax as the income generated by the settlor-interested trust is considered as the income of settlor.

How tax is paid:

Trustee pays the income tax on the trust income by filing out a Trust and Estate return. They give Settlor the statement of the tax files. Settlor tells HMRC about the tax the trustees have paid on their behalf on a Self-Assessment tax return.

Non-resident trusts

In Non-resident trust, Trustees are not UK resident for tax purposes.

A non-resident trust is one,

that has trustees who are all resident outside the UK, or
where there’s a mix of resident and non-resident trustees acting at the same time, and the settlor was neither resident in the UK nor domiciled in the UK, when the trust was set up or any later funds were added.

Domicile refers to the country that a person treats as their permanent home.

To set up a non-resident trust in the UK, you need to register the trust, to make sure the trust complies with anti-money laundering regulations. When the trust has liable UK income or UK assets, you will need to register the trust either as an

agent registering a client trust, or
trustee.

How does non-resident trust taxed?

Tax rules on a non-resident trust depends on the type of trust, if settlor has interest in trust, and resident status of settlor or beneficiaries.

Income Tax:

Trust Type	Tax- Compliance
Trust Type	Income	Dividend Income	Interest Income from investments
Interest in possession trusts	20%	8.75%
Discretionary trusts	20% on first £1,000 45% on the remaining income	39.35% on income from stocks and shares	45%, if there is a beneficiary or potential beneficiary who is a UK tax resident.
Accumulation trusts	20% on first £1,000 45% on the remaining income	39.35% on income from stocks and shares	45%, if there is a beneficiary or potential beneficiary who is a UK tax resident.

Capital Gains Tax:

You need to pay Capital Gain tax if the value of the assets has increased from the time they were invested in the trust and are sold, given away or exchanged. A settlor or the beneficiaries may have to pay tax on the profits made by the non-resident trustees. If non-resident trustee disposes a UK property or land, then they are liable to Capital gains Tax.

Inheritance Tax:

Trustees of non-resident trusts will only have to pay tax on assets situated outside the UK, if the settlor was domiciled in the UK when the assets were put into the trust. Inheritance tax may be due when:

assets are put into the trust,
the trust reaches a ten-year anniversary, or
assets are taken out of the trust or the trust ceases.

Mixed trusts

Combination of trust types.

How to register a trust?

You should register a trust if the trust has a liable UK income or UK assets. The process to register a trust as an agent or a trustee is same.

Fill out the registration form at HMRC website, providing details of non-resident trust, its trustees, beneficiaries, and activities in the UK. Details like trust’s legal name, address, tax identification number (if applicable), and the names and contact information of trustees and beneficiaries.
Submit supporting documents like trust deeds, identification documents for trustees.
Pay the required fees and submit the registration form and wait for the registration confirmation.
After registration, you will get a Unique Taxpayer Reference, which will be needed to file self-assessment tax return.
Ensure ongoing compliance with all legal and regulatory requirements applicable to agents and trusts operating in the UK.

When should you not register a trust?

Individuals may choose to not to register a trust if the trust assets are minimal involving no legal tax implications. This could be possible for a trust that is:

Arranged informally and involves only the family members or close relatives.
A revocable trust, where the settlor has the right to modify or revoke the trust arrangement.
Discretionary trusts that do not generate taxable income or have minimal assets.
Trusts established solely for the purpose of holding and managing specific assets, such as property or investments.
Low risk of disputes or conflicts among beneficiaries, trustees, or other parties.

What will happen if you fail to register a trust?

If the trust is non-complaint with the UK laws, then it could face legal consequences such as:

Challenges to the trust’s validity or enforceability.
Penalties or fines imposed by HMRC.
Loss of registered trust benefits like tax reliefs, exemptions, or preferential treatment.
Non availability of financial institutions like opening a bank account.
Regulatory scrutiny or investigation by authorities.

When do you pay Capital Gains Tax (CGT)?

Capital Gains tax is tax on the profit when an asset that’s increased in value is taken out of or put into a trust. If the asset is put in a trust, then CGT is paid by the settlor transferring the asset or person selling the asset. If assets are taken out, then trustee pays the tax on behalf of the beneficiary.

Based on the eligibility, trustee can claim for below reliefs:

Private Residence Relief: No CGT if trustee sells a trust owned property.
Business Asset Disposal Relief: 10% CGT on qualifying gains if they sell assets used in a beneficiary’s business, which has now ended. If beneficiary has 5% shares and voting rights, then they may get relief when they sell shares.
Hold-Over Relief: No CGT if transfer assets to beneficiaries.

Tax free allowance: £3,000.

For vulnerable beneficiary (disable or a child whose parents died), tax free allowance: £6,000.

When do you pay Inheritance Tax?

Inheritance tax is applicable on the person estate when they die or transfer some of their estate into a trust even when they are alive, or the trust reaches the 10-year anniversary, or assets are transferred out of a trust.

Tax on Inheritance tax: 40% above the threshold (£325,000), or 36% if person leaves 10% of the estate to charity.

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