What Is Income Tax and Who Pays It?
Income tax is a direct tax levied by HM Revenue & Customs (HMRC) on most types of income, including employment earnings, self-employment profits, pensions, rental income, and certain foreign sources. UK residents are generally taxed on their worldwide income, while non-residents pay only on UK-sourced income.
For the 2026/27 tax year, the personal allowance stands at £12,570. This means the first £12,570 of income is tax-free for most people. The allowance begins to taper for individuals with adjusted net income above £100,000, reducing by £1 for every £2 earned over that threshold until it is fully withdrawn at £125,140.
Income tax bands for England, Wales, and Northern Ireland (Scotland has its own slightly different bands) are as follows:
- Personal Allowance: £0 – £12,570 at 0%
- Basic rate: £12,571 – £50,270 at 20%
- Higher rate: £50,271 – £125,140 at 40%
- Additional rate: Over £125,140 at 45%
These thresholds apply after deducting the personal allowance. Dividend income and savings income have separate rates and allowances, but they still count toward determining your overall tax band. Employers deduct income tax through PAYE for salaried workers, while self-employed individuals must file a Self Assessment tax return by 31 January following the tax year.
Recent Changes to Foreign Income and Remittance UK Taxation
One of the most significant shifts in recent UK tax history occurred on 6 April 2025 with the abolition of the long-standing remittance UK basis of taxation. Previously, non-domiciled (non-dom) individuals could opt to be taxed only on UK-source income and any foreign income or gains they “remitted” (brought) into the UK. This allowed many expats and international professionals to keep foreign earnings offshore without immediate UK tax.
The remittance UK rules have now been replaced by a residence-based system. All UK residents are taxed on the arising basis for worldwide income and gains from 6 April 2025 onward, unless they qualify for transitional relief.
To support new arrivals, the government introduced the Foreign Income and Gains (FIG) regime. Qualifying new residents—those who have not been UK resident for at least 10 consecutive tax years prior to arrival—can claim full relief on foreign income and gains for up to four consecutive tax years. Importantly, unlike the old remittance UK system, you can now bring these funds into the UK without triggering a tax charge during the relief period.
For those with pre-6 April 2025 foreign income and gains, the Temporary Repatriation Facility (TRF) offers a reduced tax rate (12% in the first two years, 15% in the third) to bring historic amounts onshore. This provides a valuable window for individuals who previously relied on the remittance UK basis to reorganise their affairs efficiently.
At Evolve Tax, we regularly advise clients on whether they qualify for the FIG regime or TRF and help structure remittances to avoid unexpected income tax bills.
How Income Tax Interacts with the Taxation of Capital Gains
While income tax applies to recurring earnings, capital gains are taxed separately under Capital Gains Tax (CGT). However, the two are closely linked because your income tax band determines the CGT rate you pay.
The annual exempt amount for CGT remains £3,000 for individuals in both 2025/26 and 2026/27 tax years. Any gains above this are taxed at:
- 18% if the gain falls within the unused basic rate band (after adding the gain to your taxable income)
- 24% on the portion falling into the higher or additional rate bands
For residential property gains, the same 18%/24% structure applies (with a 60-day reporting and payment window). Business Asset Disposal Relief and Investors’ Relief may offer reduced rates in specific circumstances, but these are now aligned at 18% following recent reforms.
The taxation of capital gains is therefore not isolated—it depends on your overall income tax position. For example, a higher-rate taxpayer selling shares or property will pay 24% on most gains, while a basic-rate taxpayer may benefit from the lower 18% slice. Careful timing of disposals, use of the annual exemption, and tax-efficient wrappers like ISAs can significantly reduce the combined impact of income tax and CGT.
Practical Tips for Managing Income Tax, Remittance UK Issues, and Capital Gains
- Maximise Allowances: Claim all available reliefs, including the marriage allowance, blind person’s allowance, and pension contributions that reduce your taxable income.
- Plan Foreign Income Carefully: If you are a new UK resident, apply for FIG relief early via your Self Assessment. Long-term residents should review pre-2025 foreign assets under the TRF before the facility closes.
- Optimise Capital Disposals: Spread gains across tax years to stay within the basic rate band where possible. Consider gifting assets to spouses or using trusts where appropriate.
- Record-Keeping for Remittances: Even though the strict remittance UK charging rules have ended, HMRC still requires clear records of foreign income movements, especially during the transitional period.
- Seek Specialist Advice: Complex cross-border situations—such as dual residency, trusts, or high-value asset sales—can trigger unexpected income tax or CGT liabilities. Professional guidance prevents costly mistakes.
Why Choose Evolve Tax for Your Income Tax Needs?
At evolvetax.co.uk, we specialise in helping individuals and businesses with income tax compliance, international tax planning, and strategic advice on remittance UK transitions and the taxation of capital gains. Our team stays ahead of HMRC policy changes to deliver tailored solutions that protect your wealth and support your goals—whether you are relocating to the UK, selling a business, or managing global investments.
Recent reforms have made the tax landscape more straightforward for new residents while closing historical loopholes. However, the interaction between income tax, foreign income rules, and CGT demands proactive planning.
For more info: https://evolvetax.co.uk/blog/remittance-basis-vs-full-non-residency-which-is-better-before-moving-to-dubai-2026-guide-for-uk-entrepreneurs--1776412268
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