Taxes in the UK vs. the US: A complete guide

Understanding the UK tax system

The UK tax system, administered by Her Majesty's Revenue and Customs, features a progressive income tax structure with varying bands of basic and additional rates, supplemented by personal allowances.

Basic tax structure in the UK

The UK tax system is characterized by its complexity and depth, encompassing multiple forms of taxation.

The backbone of the UK's approach to taxation is embodied in the income tax bands and rates, which are essential for managing UK income.

UK PAYE tax rates and thresholds

The current rates for the UK Pay As You Earn system for the 2025-2026 tax year are as follows:

For the UK tax year 2025/2026, the standard personal allowance for employees remains at £12,570, unchanged from 2021. This allowance is equivalent to:

• £242 per week
• £1,048 per month
• 12,570 per year

UK vs. US income tax rate comparison

When comparing tax rates in the United Kingdom and the United States, it's important to understand the nuances of each system.

Both countries use a progressive tax system, but the specific rates and how they are applied differ significantly.

US income tax rates for single filers

In the United States, single filers are subject to different tax rates depending on their income level.

For the tax year 2024-2025, the federal income tax rates for single filers are as follows:

US income taxes for married taxpayers filing jointly

Married taxpayers in the US can file jointly, which often results in a lower tax liability than filing separately.

The tax brackets for married couples filing jointly for the tax year 2024-2025 are as follows:

In contrast to the US system, the UK tax structure for individuals is characterized by fewer brackets and a simpler rate progression. Key differences include

• Individuals in the UK have a tax-free personal allowance of £12,570, while the US uses a standard deduction system instead, currently set at $30,000 for single filers.
• The basic tax rate in the UK is 20%, which applies to income above the personal allowance and up to £50,270 in England, Wales, and Northern Ireland.
• The UK applies a higher rate of 40% and an additional rate of 45% for the highest earners (above £125,140), which start at lower income levels than the US top rates.
• While both systems are progressive, the UK (outside Scotland) has fewer income brackets and a higher starting rate after the allowance.

By contrast, the US has seven federal tax brackets, ranging from 10% to 37%, allowing for a more gradual increase in tax rates. However, when combined with state and local taxes, the overall tax burden in the US can be significantly higher, especially in high-tax states.

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UK vs. US corporate taxation

Corporate taxation is a critical aspect of the economic landscape in both the United Kingdom and the United States.

While both countries aim to create a competitive environment for business, their approaches to corporate taxation differ in several key respects.

Corporate tax rates in the UK (2025/26)

In the United Kingdom, corporation tax rates vary according to company size and sector-specific rules:

• The main rate of corporation tax is 25% and applies to companies with profits over £250,000.
• Smaller companies with profits up to £50,000 benefit from a reduced small profits rate of 19%.
• Companies with profits between £50,001 and £250,000 may qualify for Marginal Relief, which gradually increases the effective tax rate within this band.
• Patent Box companies pay a reduced rate of 10% on profits from qualifying patents.
• Banks pay a 3% surcharge on profits over £100 million.
• Oil and gas companies are subject to a ring-fenced rate of 30%, a surcharge of 10%, and an additional Energy Profits Levy of 35%, resulting in a combined rate of up to 75% on certain profits.

Corporate tax system in the US (2025/26)

The US corporate tax system includes:

Federal tax: A flat rate of 21% on all taxable corporate income.

State taxes: These vary from state to state, ranging from 1% to 12%. Some states, such as Nevada and Wyoming, have no corporate income tax.

Minimum tax: A 15% alternative minimum tax applies to large corporations with an average income of over $1 billion.

Incentives: Tax credits for R&D, green energy, and other strategic investments.

International provisions: US multinationals are taxed under systems such as GILTI and FDII for foreign income and export incentives.

UK vs. US capital gains taxes

Capital gains taxes apply to gains from the sale of assets such as stocks, bonds, real estate, or businesses. Both the United States and the United Kingdom levy capital gains taxes, but the rules and rates vary considerably.

US capital gains tax rates (2025)

The US distinguishes between short-term and long-term capital gains:

• Short-term capital gains apply to assets held for one year or less and are taxed as ordinary income at rates ranging from 10% to 37%.
• Long-term capital gains for assets held more than one year benefit from lower rates: 0%, 15%, or 20%, depending on income and filing status.

Below is a detailed table showing the specific long-term capital gains tax rates for 2025 based on income tax thresholds and filing status.

UK capital gains tax rates (2025)

The UK capital gains tax system depends on your income level and the type of asset you are selling:

When comparing the taxation of capital gains in the United States and the United Kingdom, the main differences are as follows:

• The US distinguishes between short-term (ordinary income rates) and long-term gains (0%, 15%, 20%), while the UK uses flat rates based on income level and asset type (10-24%).
• US long-term rates are generally lower, especially for lower income earners.
• The UK offers an annual exemption (£3,000 in 2025/26) that the US does not.
• Both countries have special provisions - Entrepreneurs' Relief in the UK and the 3.8% Net Investment Income Tax in the US.

UK vs. US VAT rates

Value Added Tax in the UK and Sales Tax in the US represent two fundamentally different approaches to the taxation of goods and services.

While both are consumption taxes, their implementation, collection, and impact on consumers and businesses differ significantly.

VAT system in the UK

The UK VAT system is a broad-based consumption tax that applies to most goods and services sold for domestic use. It is charged at different rates depending on the nature of the goods or services.

• The standard rate of VAT is 20%, which applies to most goods and services.
• A reduced rate of 5% applies to certain items, such as child car seats and household energy.
• Zero-rated items, such as most food and children's clothing, are taxable but at a 0% rate, meaning that businesses can reclaim VAT on the associated expenditure.
• Some services, such as education, health care, and admission to cultural events, are exempt from VAT, meaning that no VAT is charged, and no input VAT is recoverable.

Sales tax structure in the US

Unlike the British VAT system, the US sales tax is a single-tier tax levied only at the point of final sale to the consumer.

• Most US states impose a sales tax on the sale of goods and some services, but rates and rules vary widely by state and locality.
• Five states- Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a statewide sales tax. However, Alaska does allow local sales taxes.
• Local governments (cities, counties) in many states add their own sales tax on top of the state rate, creating a combined rate that can exceed 9% in some areas (e.g., Louisiana, Tennessee).
• Essential items such as food and prescription drugs are exempt or taxed at lower rates in many states.

Estate and inheritance taxes

Estate and inheritance taxes are important considerations in wealth management and estate planning.

Both the UK and the US impose taxes on the transfer of wealth at death, but the systems and rules governing these taxes differ significantly.

Inheritance tax in the UK

• Inheritance tax is charged on the estate of a deceased person above the £325,000 nil rate band. The standard rate is 40% on the amount above this threshold.
• Transfers between spouses or civil partners resident in the UK are exempt from inheritance tax.
• An additional £175,000 residence nil-rate band may apply when passing a home to direct descendants, potentially increasing the tax-free threshold to £500,000.
• Lifetime gifts may be taxed if the donor dies within 7 years. Taper relief reduces the tax payable on gifts made more than 3 years before death.
• From April 2025, long-term UK residents (10 out of the last 20 years) will be subject to IHT on their worldwide assets, even after leaving the UK for up to 10 years.

Estate taxes in the US

The United States imposes an estate tax on the transfer of a decedent's assets before distribution to beneficiaries.

1. The US estate tax applies only to estates above a certain exemption amount, which is set by federal law and adjusted periodically. The maximum federal estate tax rate is 40%, but the effective rate depends on the value of the estate.
2. The US uses a unified credit system, which effectively allows a certain amount of assets to be transferred tax-free during life or at death.
3. In addition to the federal estate tax, some states impose their own estate or inheritance taxes, with varying rates and exemptions.
4. In the US, any unused portion of the estate tax exemption can be transferred to the surviving spouse (known as portability), potentially doubling the amount the couple can pass on tax-free.

UK vs. US property taxes

In both the UK and the US, property taxes are an important source of local government revenue.

These taxes are levied on property ownership and differ significantly in structure and implementation in the two countries.

Council tax and other property taxes in the United Kingdom

In the United Kingdom, property taxes primarily take the form of Council Tax and other specific property-related levies.

Council Tax This is a local tax levied by councils to fund local services such as refuse collection, policing, and education. The amount of Council Tax payable depends on the valuation band of the property, which is based on its rateable value.

Properties are classified into one of eight bands (A to H) based on their value on April 1, 1991. The band determines the amount of Council Tax payable.

Stamp duty land tax

When buying property in the UK, buyers may be required to pay SDLT. The rates depend on the value of the property, whether it's residential or non-residential, and the status of the buyer (e.g. first-time buyer or non-resident).

SDLT rates for residential properties:

• 0% on properties up to £125,000
• 2% on £125,001–£250,000
• 5% on £250,001–£925,000
• 10% on £925,001–£1.5 million
• 12% on the portion over £1.5 million

First-time buyer relief:

• 0% up to £300,000
• 5% on £300,001–£500,000
• No relief above £500,000

Property tax system in the USA

The US property tax system is more varied, with taxes levied at the local (county or municipal) level and based on the assessed value of the property.
Properties are periodically assessed to determine their current market value. The assessed value is then used as the basis for calculating property taxes.

Property taxes are calculated using a millage rate, a specific dollar amount per $1,000 of assessed property value. Millage rates vary from place to place.

Many states offer homestead exemptions, which reduce the taxable value of a home for primary residents, thereby reducing their tax burden.

Property tax rates and rules can vary widely from one state or locality to another, reflecting the decentralized nature of the US tax system.

Tax benefits and credits

Tax benefits and credits are essential tools used by governments to incentivize behavior, provide relief to taxpayers, and address social issues. In both the UK and the US, these fiscal mechanisms play a crucial role in the overall tax strategy.

However, the nature and implementation of these benefits differ significantly between the two countries.

Tax credits in the UK

1. Working tax credit. Aimed at low-income workers, this credit provides financial support to those who meet certain criteria related to hours worked and income levels.
2. Child tax credit. Designed to support families with children, this benefit provides additional financial support based on the number of children and family income.
3. Marriage allowance. Allows a portion of the personal exemption to be transferred from one spouse to another, beneficial for couples where one partner earns significantly less than the other.
4. Research and Development tax credits. Companies that engage in qualified R&D activities can claim these credits, which encourage innovation and investment in new technologies.
    

   Also read. Tax guide for Americans in the UK

US tax deductions and credits

1. Standard deduction. This is a flat amount deducted from income before taxes are calculated and is available to all taxpayers who do not itemize deductions.
2. Itemized deductions. Taxpayers may choose to itemize deductions if it provides a greater tax benefit. Common itemized deductions include mortgage interest, state and local taxes, and charitable contributions.
3. Child tax credit. Similar to the UK, the US offers a credit for taxpayers with dependent children that can significantly reduce tax liability.
4. Earned Income Tax Credit (EITC). Designed for low- to moderate-income working individuals and families, the EITC reduces the amount of tax owed and may result in a refund.
5. Education credits. These include the American Opportunity Tax Credit and the Lifetime Learning Credit, which provide relief for those pursuing higher education.

UK vs. US tax filing process comparison

Filing taxes is an annual ritual in both the United Kingdom and the United States, but the systems and procedures differ significantly.

Understanding these differences is critical for taxpayers in each country, especially those with financial obligations in both nations.

Tax filing in the UK

The UK tax filing process is administered by HMRC and is characterized by an emphasis on simplicity and automation for the majority of taxpayers.

• In the UK, taxes for many individuals are managed via the PAYE system, where both income tax and National Insurance contributions are directly deducted from salaries by employers and forwarded to HMRC. This process often eliminates the need for these employees to submit an individual tax return.
• Those with more complex tax situations, such as the self-employed, company directors, or those with significant investment or savings income, must complete a self-assessment tax return each year.
• The self-assessment tax return can be filed online through the HMRC website. The deadline for online filing is 31 January following the end of the tax year in April.

Tax return process in the US

In the US, the IRS oversees the tax filing process, which is more uniform in requiring annual tax returns from most taxpayers.

• Almost all individuals and businesses in the US are required to file annual tax returns, regardless of whether their taxes are withheld at source.
• The standard form for individual tax returns is Form 1040. There are variations of this form for different tax situations.
• The typical filing deadline is April 15 of each year for the previous calendar year.
• The IRS encourages the use of electronic filing, which is faster and more secure. Many taxpayers also use tax preparation software to help them file their returns.

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