United Kingdom

The United Kingdom uses a Pay As You Earn (PAYE) system for income tax collection. The tax-free personal allowance is GBP 12,570, above which income is taxed at the basic rate of 20% (up to GBP 50,270), the higher rate of 40% (up to GBP 125,140), and the additional rate of 45%. The personal allowance tapers at GBP 1 for every GBP 2 earned above GBP 100,000, creating an effective 60% marginal rate in that band. National Insurance Contributions (NIC) are separate from income tax. Employees pay 8% on earnings between GBP 12,570 and GBP 50,270, and 2% on earnings above that threshold. Employers pay 13.8% on all earnings above GBP 9,100, with no upper limit. Pension auto-enrolment requires minimum contributions of 8% of qualifying earnings (5% employee, 3% employer), though many employers offer more generous schemes. Pension contributions receive tax relief at the individual's marginal rate, making them a powerful tax planning tool. The annual pension allowance is GBP 60,000. The UK also taxes capital gains above the annual exempt amount (GBP 3,000 for 2025-26) at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers on most assets. Dividends have their own tax rates: 8.75%, 33.75%, and 39.35% for basic, higher, and additional rate bands respectively, with a GBP 500 dividend allowance. Scotland has its own income tax rates with six bands, ranging from 19% to 48%, generally resulting in higher tax for middle and high earners compared to the rest of the UK. VAT is 20%, with reduced rates on certain goods.