UK tax law explained

The UK tax system is complex, but its core purpose is simple: to raise revenue for public services through a mix of income tax, social contributions, spending tax, and capital taxes. Whether you are an employee, self-employed, or business owner, understanding the basics of how UK tax works helps you meet your obligations, claim what you are entitled to, and know your rights when HMRC gets in touch.

This page explains the main taxes, how disputes are handled, and what happens if HMRC investigates you.

The short version

UK residents and UK-sourced income are subject to taxation. The main taxes are income tax (on earnings), National Insurance (social contribution), VAT (on sales of goods and services), Capital Gains Tax (on profit from selling assets), Inheritance Tax (on estates over the nil-rate band), and Corporation Tax (on company profits). HMRC is the tax authority. If you disagree with an HMRC decision, you can ask for statutory review or appeal to the First-tier Tax Tribunal. Most assessments must be raised within four years; fraud extends this to twenty years.

At a glance

Income tax

Income tax in the UK is collected through Pay As You Earn (PAYE) if you are an employee, or through Self Assessment if you are self-employed or have investment income.

PAYE (Pay As You Earn)

Your employer deducts income tax and National Insurance from your salary each month, based on a tax code issued by HMRC. The current personal allowance (the amount you can earn before tax is due) is GBP 12,570 for the 2024/25 tax year. Above that:

• Basic rate: 20% on income up to GBP 50,270
• Higher rate: 40% on income between GBP 50,271 and GBP 125,140
• Additional rate: 45% on income above GBP 125,140

If you have only employment income and are a standard taxpayer, PAYE handles most of your tax, and you may not need to file a Self Assessment return.

Self Assessment

If you are self-employed, a partner, or receive rental or investment income, you must usually file a Self Assessment tax return each year (by 31 January). You declare all your income, claim allowable deductions, and HMRC calculates the tax you owe. If you owe more than a threshold amount, you pay in two instalments: on 31 January and 31 July.

Allowable deductions for self-employed individuals include business premises costs, equipment, professional fees, and staff wages. Personal expenses, entertaining, and fines are not deductible.

National Insurance

National Insurance contributions fund the state pension, healthcare, and benefits. There are several classes.

Class 1 (employees and employers)

Employees pay 8% on earnings between GBP 12,570 and GBP 50,270 per year (as of 2024/25), and 2% on earnings above that. Employers pay 15% on earnings above GBP 9,100. This is collected through PAYE.

Class 2 (self-employed)

A flat weekly contribution (currently GBP 163.80 per week for 2024/25). You pay this if you are self-employed and profit exceeds GBP 6,725. It goes toward the state pension.

Class 4 (self-employed profits)

A percentage (currently 6%) on profits between GBP 11,908 and GBP 50,270, and 2% on profits above that. You pay this alongside your income tax return.

VAT basics

VAT (Value Added Tax) is a 20% tax on the supply of most goods and services in the UK. Some items are taxed at a reduced rate of 5% (e.g. fuel, children's car seats), and some at 0% (e.g. books, food). Some supplies are exempt (e.g. financial services, insurance).

If you run a business and your turnover exceeds GBP 85,000 (as of 2024/25), you must register for VAT. Once registered, you charge VAT on your sales, but can reclaim VAT you have paid on business purchases (input tax). You file a VAT return to HMRC each quarter, showing the VAT you have charged (output tax) and the VAT you have reclaimed (input tax), and you pay the net amount.

Failure to register or file VAT returns on time can result in penalties and interest.

Capital Gains Tax

Capital Gains Tax (CGT) is charged on the gain (profit) you make when you sell or dispose of an asset.

Basic principles

The gain is the selling price minus the cost of acquisition (and any allowable expenses of disposal). For example, if you buy a buy-to-let property for GBP 200,000 and sell it for GBP 300,000, the gain is GBP 100,000 (subject to CGT).

Each tax year, you have an annual exempt amount (currently GBP 3,000) that you can make in gains without paying any tax. Above that, you pay:

• 20% (basic rate) if you are a basic rate taxpayer
• 20% (higher rate) if you are a higher rate taxpayer on most gains; 28% on gains from residential property

Main residence and other reliefs

Your main residence (the property you live in) is exempt from CGT. You can also claim Letting Relief if you let out part of your home, and principal private residence relief for periods of absence. These reliefs are restricted under rules introduced in April 2020.

Business Asset Disposal Relief (formerly Entrepreneurs' Relief) gives a lower rate of 10% on gains from the sale of a qualifying business or shares in a trading company, up to a lifetime limit of GBP 1 million.

Inheritance Tax

Inheritance Tax is a tax on the value of a person's estate on death. It is charged at 40% on the value of the estate above the nil-rate band (currently GBP 325,000). If you are married or in a civil partnership, you can pass your unused nil-rate band to your surviving partner.

The residence nil-rate band (a separate allowance for gifts of a home to direct descendants) is GBP 175,000. These thresholds are frozen until 2026.

For more detail, see the Inheritance Law UK page.

Corporation Tax

Corporations (limited companies) pay tax on profits at the following rates (as of 2024/25):

• 19% on profits up to GBP 50,000
• 25% on profits over GBP 250,000
• Marginal Relief: companies with profits between GBP 50,000 and GBP 250,000 pay a blended rate (between 19% and 25%)

Companies file a Corporation Tax return (usually within 12 months of the end of the accounting period) and pay tax nine months and one day after the year-end. Larger companies (with a turnover above GBP 500,000 or profits above GBP 250,000) must pay in quarterly instalments (Quarterly Instalment Payments).

HMRC enquiries and discovery assessments

HMRC has broad powers to investigate taxpayers. An enquiry (also called an investigation) can be raised within four years of the deadline for submitting a tax return (e.g. by 31 January 2025 for a 2023/24 return, so the limit is usually four years from the end of the tax year).

Types of enquiry

A general enquiry is routine and can cover any aspect of your return. A focused enquiry is narrower and targets a specific area (e.g. business mileage claims or rental income). HMRC must tell you the scope of the enquiry in writing.

You have a right to know why HMRC is enquiring and what information it needs. You must respond to notices and provide documents within a specified timeframe (usually 30 days, extendable).

Discovery assessments

If HMRC finds that you have underpaid tax due to carelessness (your mistake), it can raise a discovery assessment going back six years. If fraud is involved, it can go back twenty years.

Statutory review and appeals

If you disagree with an HMRC decision (e.g. the outcome of an enquiry, a determination of the tax you owe, or a penalty), you have the right to ask for a statutory review or appeal to the First-tier Tax Tribunal.

Statutory review

You can ask HMRC itself to review the decision. The review is carried out by an officer not involved in the original decision. HMRC must give you a review notice setting out the steps it will take and the timeframe (usually 45 days, extendable to no more than 120 days).

First-tier Tax Tribunal

If you are unhappy with the review outcome, or prefer not to ask HMRC to review its own decision, you can appeal to the First-tier Tax Tribunal (a court-like body). You must appeal within 30 days of the HMRC decision (or the review conclusion).

First-tier Tax Tribunal process

The First-tier Tax Tribunal hears disputes about tax, penalties, customs, and excise. It is independent of HMRC.

Informal and formal procedures

Most tax cases are heard under the informal procedure, which is quick and accessible. You do not need a lawyer. You present your case (in writing or at a hearing), and the tribunal decides. There is no cross-examination, and the rules of evidence are relaxed.

For larger cases or complex points of law, the formal procedure applies. This is more like a court, with stricter evidence rules and the option of cross-examination.

The hearing

You can appear in person, by telephone, or on paper (written submissions only). You can bring a representative (a tax agent, accountant, solicitor, or friend). Hearings are usually held at a regional tribunal office.

The tribunal issues a decision in writing, setting out its findings of fact and reasoning. You can appeal further to the Upper Tribunal if you believe the First-tier Tribunal made an error of law, but only with permission.

Time limits

UK tax law operates strict time limits. These protect both taxpayers and HMRC.

• General rule: HMRC must raise an assessment within four years of the tax year-end (so by 5 April 2025 for the 2023/24 tax year).
• Careless error: Six years (if the taxpayer was careless and underpaid tax).
• Fraud or dishonesty: Twenty years.

For Inheritance Tax, the time limit is normally four years from the date of death. For VAT, the limit varies depending on the type of issue but is usually three or four years.

If you make a claim for a refund (e.g. overpaid tax), you generally have four years to claim from the end of the tax year in which you made the overpayment.

Common misconceptions

"Cash in hand is not taxable." Wrong. All income, whether paid in cash, by cheque, or by bank transfer, is taxable. If HMRC suspects you are hiding cash income, it can raise an assessment based on lifestyle evidence.

"I do not need to declare hobby income." If you carry on an activity with a view to making a profit, you must declare the income, even if it is small. The distinction between a hobby and a trade is fact-specific.

"Penalties only apply to big businesses." Penalties apply to all taxpayers. A failure to file a return on time can result in a GBP 100 penalty, rising to GBP 1,000 if the return is over a year late. Incorrect returns attract penalties of up to 100% of the unpaid tax.

"My accountant is responsible for my tax." You are responsible for the information on your tax return. If it is wrong, you are liable, even if your accountant made the error. You should always check your return before submitting it.

"I do not need to keep records for long." You must keep records for at least five years for income tax and self-employed income; six years for VAT. Poor record-keeping can result in a discovery assessment going back the maximum period allowed.

Related concepts

• Inheritance Law UK
• HMRC Self Assessment
• First-tier Tax Tribunal procedure
• VAT compliance and returns
• Self-employed tax obligations
• Penalties and interest (late payment, failure to file)
• Tax relief (charitable giving, pension contributions)
• Allowable business expenses
• Capital allowances (plant and machinery)

Sources

• HM Revenue and Customs (HMRC) - Official UK tax authority
• First-tier Tax Tribunal - Independent tribunal for tax disputes
• Income Tax Act 2007 - Primary legislation governing income tax
• Value Added Tax Act 1994 - Primary legislation governing VAT
• Taxation of Chargeable Gains Act 1992 - Primary legislation governing Capital Gains Tax

Written by Peter Kolomiets, founder of CaseCalm. UK content reviewed 2026-05-28.

Disclaimer: This page provides general information about UK tax law. It is not tax or legal advice. Tax law is complex and individual circumstances vary. If you are unsure about your tax obligations, or have received a notice from HMRC, seek advice from a qualified tax specialist, accountant, or solicitor.