UK Tax overview
In the United Kingdom, there exist several types of taxes that pertain to individuals and companies. In the following section, we will provide a brief overview of some commonly encountered ones:
Income tax
The amount of Income Tax you pay in a tax year depends on several factors. Firstly, it is determined by the extent to which your income exceeds the Personal Allowance, which represents the portion of income exempt from taxation. Moreover, the specific tax band within which your income falls also influences the amount of tax owed. It is worth noting that certain types of income are exempt from taxation.
For the tax year 2024/25, the standard Personal Allowance is set at £12,570. The tax rates range from 20% to 45%, depending on the applicable tax band for your income. Specifically, the rates are as follows:
Basic Rate: 20% tax on earnings between £12,571 and £50,270.
Higher Rate: 40% tax on earnings between £50,271 and £125,140.
Additional Rate: 45% tax on earnings over £125,140.
To gain a comprehensive understanding of your Income Tax obligations, it is essential to review your Personal Allowance, tax code, and the amount of tax paid and anticipated for the year.
Additionally, there are tax-free allowances for savings interest, dividends from share ownership, self-employment income (up to £1,000 through the trading allowance), and rental income (up to £1,000 unless using the Rent a Room Scheme). Any interest, dividends, or income exceeding these allowances is subject to taxation.
National Insurance (NI)
National Insurance contributions are essential for qualifying for benefits and the State Pension. Before starting contributions, obtaining a National Insurance number is necessary.
Mandatory contributions apply to employees earning over £242 per week and self-employed individuals with profits exceeding £12,570 annually. However, individuals earning between £123 and £242 per week as employees or with self-employed profits ranging from £6,725 to £12,570 per year can still qualify for benefits and the State Pension without paying National Insurance.
National Insurance classes vary based on employment status and income. The current National Insurance rate for the tax year 2024/25 is composed of 8% of weekly earnings between £242 and £967 and 2% of weekly earnings above £967. Please note that Class 2 National Insurance are abolished from April 2024.
Business tax
Capital Gains Tax (CGT)
Capital Gains Tax is a tax levied on the profit obtained from the sale or disposal of assets that have increased in value. The tax is calculated based on the gain realized rather than the total amount received. For example, if an asset is purchased for £5,000 and subsequently sold for £25,000, the gain would amount to £20,000 (£25,000 minus £5,000). Certain assets are exempt from Capital Gains Tax, and if the total gains within a year fall below the tax-free allowance (2023/24: £6,000; 2024/25: £3,000), no tax is owed. Disposing of an asset includes various actions such as selling, gifting, transferring, swapping, or receiving compensation for it.
If you have overseas assets, it's important to note that you may still be liable to pay Capital Gains Tax, even if the asset is located outside of the UK. Special rules apply if you are a UK resident but your permanent home is not in the UK. In such cases, you may have to pay tax on gains made from property and land in the UK, regardless of your non-resident status for tax purposes. However, Capital Gains Tax generally does not apply to other UK assets, such as shares in UK companies, unless you return to the UK within 5 years of leaving.
Inheritance Tax (IHT)
Inheritance Tax is a tax levied on the estate, including property, money, and possessions, of a deceased individual. Generally, there is no Inheritance Tax to pay if the estate's value is below the £325,000 threshold or if everything above the threshold is left to a spouse, civil partner, charity, or community amateur sports club. However, even if the estate is below the threshold, reporting its value may still be necessary. If you gift your home to your children or grandchildren, the threshold can increase to £500,000. If you're married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner's threshold upon your death. The standard Inheritance Tax rate is 40% and applies only to the part of the estate above the threshold.
Value Added Tax (VAT)
VAT registration is required if your total VAT taxable turnover for the past 12 months exceeds £90,000 (the VAT threshold) or if you expect your turnover to exceed £90,000 within the next 30 days. If your business is based outside the UK and you supply goods or services to the UK (or expect to do so in the next 30 days), you must register for VAT, regardless of your VAT taxable turnover. You can also voluntarily register for VAT even if your turnover is below £90,000. Once registered, you must promptly pay any VAT owed to HM Revenue and Customs (HMRC). If all the items you sell are exempt from VAT, you do not need to register for VAT.
Corporation Tax (CT)
Corporation Tax is payable on profits generated by various entities, including limited companies, foreign companies with a UK branch or office, and unincorporated associations like clubs or co-operatives. Unlike personal taxes, there is no bill issued for Corporation Tax, and specific actions must be taken to calculate, pay, and report the tax. You must first register for Corporation Tax, maintain accounting records and prepare a Company Tax Return to determine the amount of Corporation Tax owed, ensure timely payment of Corporation Tax and file the Company Tax Return by the deadline, typically 12 months after the end of the accounting period, which usually aligns with the financial year covered by annual accounts. Corporation Tax is applicable to taxable profits derived from business activities (trading profits), investments, and gains from selling assets at a higher value than their cost (chargeable gains). If a company is UK-based, it is liable for Corporation Tax on all profits earned from both domestic and international sources. Non-UK-based companies with an office or branch in the UK pay Corporation Tax solely on profits generated from their UK activities. Starting from 1 April 2023, the effective rate of Corporation Tax varies between 19% and 25% based on your company's accounting period and level of profit.
Companies with profits of £50,000 or less will pay a small profits rate of 19%
The Corporation Tax main rate for non-ring fence profits has increased to 25% for profits above £250,000
Companies with profits between £50,000 and £250,000 will pay tax at the main rate, reduced by a marginal relief
Construction Industry Scheme (CIS)
Under the Construction Industry Scheme (CIS), contractors are required to deduct money from payments made to subcontractors and submit it to HM Revenue and Customs (HMRC). These deductions serve as advance payments towards the subcontractor's tax and National Insurance contributions. Contractors must register for the scheme, while subcontractors are not obligated to register but face higher deduction rates if they are not registered. Registered contractors can access the CIS online platform to file monthly returns or verify subcontractors. Contractors include those who pay subcontractors for construction work or have spent over £3 million on construction in the 12 months since their first payment. Subcontractors should register if they engage in construction work for a contractor. If applicable, individuals may need to register as both a contractor and a subcontractor.
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