- Statute Law: This consists of Acts of Parliament, which are amended annually by the Finance Act following the government's Budget proposals. It also includes secondary legislation known as statutory instruments.
- Case Law: Decisions made by judges in court cases that interpret how tax laws should be applied.
- HMRC Guidance: While not strictly law, HMRC issues various statements and documents that act as a guide to the law.
The Tax Year and Reporting
Tax rules and rates often change from one year to the next, making it vital to apply the correct rules to the specific "tax year" in question.
| Taxpayer Type | Tax Year Period | Known As |
|---|
| Individuals | 6 April to 5 April | Fiscal Year / Year of Assessment |
| Companies | 1 April to 31 March | Financial Year (FY) |
Self Assessment
For individuals, the system used to assess liability for income tax and capital gains tax is called Self Assessment. If an individual's tax cannot be fully collected via deduction at source (like PAYE), they must complete a tax return.
Key Filing and Payment Dates:
- Filing Paper Returns: Must be filed by 31 October following the tax year.
- Filing Electronic Returns: Must be filed by 31 January following the tax year.
- Payments on Account (POA): Tax is often paid in installments:
- First POA: 31 January in the current tax year.
- Second POA: 31 July following the tax year.
- Final Balancing Payment: 31 January following the tax year.
Note on Notification: If you do not receive a notice to submit a return but have taxable income, you must notify HMRC of your chargeability within 6 months of the end of the tax year.
Record Keeping and Compliance
Taxpayers must maintain records to justify the figures on their returns.
- Business/Property owners: Must keep records for five years after the 31 January following the tax year.
- Others: Must keep records for one year after the 31 January following the tax year.
HMRC has the power to conduct enquiries if they suspect errors, or issue discovery assessments if they find that full disclosure was not made. If a taxpayer disagrees with an assessment, they may lodge an appeal in writing within 30 days.
Ethics: Avoidance vs. Evasion
It is crucial to distinguish between legal tax planning and illegal activity:
- Tax Avoidance: Legal. This involves organizing financial affairs to minimize the tax burden.
- Tax Evasion: Illegal. This involves dishonest behavior, such as concealing income.
To combat "abusive" arrangements—those that exploit loopholes or involve contrived steps—HMRC uses the General Anti-Abuse Rule (GAAR).
Income Tax Computation
For UK residents, income tax is charged on worldwide income. Income is categorized into three distinct layers:
- Non-savings income: Employment, trading (business), and property income.
- Savings income: Interest from banks, building societies, or government securities.
- Dividend income: Distributions from shares.
Typical Computation Structure
A standard computation follows this logic:
&\text{Total Income (Non-savings + Savings + Dividends)} \\
&- \text{Tax Reliefs} \\
&= \text{Net Income} \\
&- \text{Personal Allowance} \\
&= \text{Taxable Income}
\end{aligned}$$
### Rates and Allowances (2026-27)
Tax rates vary depending on the type of income and the taxpayer's total income level.
**Non-Savings Income Rates (Non-Scottish):**
* **Basic Rate**: 20%
* **Higher Rate**: 40%
* **Additional Rate**: 45%
*Note: Scottish taxpayers follow different rates for non-savings income, featuring six bands including a 19% starter rate.*
**Key Allowances to Reduce Tax:**
* **Personal Allowance**: Reduces the total amount of income subject to tax.
* **Personal Savings Allowance (PSA)**: Provides a 0% rate on savings income. For basic rate taxpayers, this is £1,000; for higher rate, £500; and for additional rate, £0.
* **Dividend Allowance**: A £500 allowance taxed at 0% for all taxpayers, regardless of income level.
* **Exempt Income**: Certain income, such as from **ISAs**, is totally exempt. Additionally, trading and property income up to £1,000 each are exempt.
## The Future: Making Tax Digital (MTD)
The UK is transitioning toward **Making Tax Digital (MTD)**. This initiative aims to replace traditional paper tax returns with digital tax accounts that are pre-populated with HMRC data.
Self-employed individuals and landlords will be required to use MTD-compliant software to record income and expenditure and provide quarterly updates. The rollout is phased based on income thresholds:
* **From 6 April 2026**: Income > £50,000.
* **From 6 April 2027**: Income > £30,000.
* **From 6 April 2028**: Income > £20,000.
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