A Brief Introduction of UK Taxation System

UK government collects revenues mainly from:

  • Income tax,
  • National Insurance contributions,
  • Value added tax (VAT), and
  • Corporation tax.

Income Tax

An income tax is a tax that governments impose on income generated by individuals or entities i.e. wages, salaries, commissions, dividends, interests, rents etc.

Income Tax year starts from 6 April and ends on 5 April of the following year. Each person has an income tax personal allowance, and income up to this amount in each tax year is free of tax. For the tax year 2016-17, personal allowance for under-65s having income less than £100,000 is £11,000. The tax free allowance for Dividends is £5,000. Also, the tax free allowance for income on your savings is £5,000 (subject to your other income).

Any income after deduction of personal allowance is taxed using following bands:

Rate

Dividend income

Savings income

Other income (incl. employment)

Tax bracket (income above personal allowance)

Basic rate

7.5%

20%

20%

£0–£32,000

Higher rate

32.5%

40%

40%

£32,001–£150,000

Additional rate

38.1%

45%

45%

Over £150,000

 

The taxpayer's income is assessed for tax according to a prescribed order i.e. income from employment is taxed first using the personal allowance, followed by savings income and then dividends.

Any UK resident who earned income in any foreign country is taxable in UK but to avoid double taxation UK government has agreements with many countries to allow offset against United Kingdom tax what is deemed paid overseas. These deemed amounts paid overseas are not essentially as much as actually paid.

The self-assessment deadline for the last tax year from 6th April 2015 to 5th April 2016 is as under:

Self-Assessment

Deadline

Register for Self-Assessment

5 October 2016

Paper Tax Return

Midnight 31 October 2016

Online Tax Return

Midnight 31 January 2017

Payment of tax

Midnight 31 January 2017

 

Value Added Tax (VAT)

 

Value Added Tax (VAT) is a tax goods and services, charged at 20% percent since 2011. If you have to pay VAT on something it will normally be included in the price you see on the shelf.

Some goods and services are exempt from VAT, and others are charged at a lower rate of 5 percent called reduced rate, such as domestic gas supplies or 0 percent called "zero-rated", such as most food items and children's clothing.

This applies to both business and non-business customers. For example:

  • A flower wholesaler will add VAT to the amount they charge a florist
  • A beauty salon will include VAT in the price they charge to their customers

You must register for VAT (compulsory registration) if:

  • Your VAT taxable turnover is more than £83,000 (the 'threshold') in a 12 month period.
  • You expect to go over the threshold in a single 30 day period.

Registering for VAT means you need to charge your customers VAT. But if your customers are VAT registered businesses they can reclaim the VAT you have charged. It also means you can reclaim any VAT you pay, so reducing your costs.

Every VAT registered business is required to file VAT return usually four times a year to show how much VAT is payable to HMRC. The deadline for submitting the return online and paying HMRC are usually the 1 calendar month and 7 days after the end of VAT accounting period.

National Insurance contributions

 

NICs are payable by employees, employers and the self-employed in return of certain benefits UK government gives to UK residents.

UK Government issues a number to NIC payers called National Insurance Number. National insurance number is written on payslip, P60 and letter about tax, pension or benefits. National insurance is paid with tax. Employer deducts the NICs of his employees from their wages and pays to HMRC whereas self-employed pays Class 2 and Class 4 National Insurance with their self-assessment.

Every UK resident needs to pay NIC if he/she is:

  • 16 or over
  • An employee earning above £155/week
  • self-employed and making a profit of £5,965 or more a year

There are certain types of National Insurance which are called classes. It depends on employment status, earnings and gaps in National Insurance record the type you pay.

National Insurance Class

Who Pay

Class 1

Employees earning more than £155 a week and under State Pension age - they’re automatically deducted by employers

Class 1A or 1B

Employers pay these directly on their employee’s expenses or benefits

Class 2

Self-employed people – it is payable if earning is less than £5,965 a year (but can choose to pay voluntary contributions)

Class 3

Voluntary contributions – pay NIC to fill or avoid gaps in your National Insurance record

Class 3A

Voluntary contribution – if pay it will top up pension with a single lump sum if retirement is due before 6 April 2016

 

 

Class 4

Self-employed people earning profits over £8,060 a year

 

Rates of Class 1 NIC for the tax year 2016-17 are:

£155 to £827 a week (£672 to £3,583 a month)

12%

Over £827 a week (£3,583 a month)

2%

 

For self-employed, two types of NIC needs to be paid.

Class 2

If your profits are £5,965 or more a year

£2.80 a week

Class 4

If your profits are £8,060 or more a year

9% on profits between £8,060 and £43,000

2% on profits over £43,000

 

Corporation Tax

 

A corporate tax, also called corporation tax or company tax, is a direct tax imposed by a jurisdiction on the profit of corporations. In UK, Corporation Tax is imposed on profits from doing business as:

  • a limited company
  • any foreign company with a UK branch or office
  • a club, co-operative or other unincorporated association, e.g. a community group or sports club

‘Accounting period’ for Corporation Tax is the time covered by Company Tax Return. The deadline for filing corporation tax return and paying the tax depends on the accounting period dates set for the company. The deadline for filing corporation tax return is 12 months after the end of the accounting period it covers and deadline for payment of tax is 9 months and one day after the end of the accounting period.

 

Team BNW

The above information should only be used as a reference point, for detailed and précised information please contact us.

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