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The UK Tax System 

An Introduction

 

This guide is intended to provide an overview of the UK tax system for those arriving in the UK. It is intended to give the reader a general understanding of the UK tax system. It is not comprehensive, and as with most tax systems there are additional allowances available in certain circumstances and restrictions which apply.

We have highlighted some of the most important, but have not attempted provide a comprehensive list.

 

The main taxes that you need to be aware of are as follows:-


1.      Income Tax

 

In general UK residents are subject to UK income tax on their worldwide income. The first £9,440 of income is tax free.  Thereafter the following rates apply:

 

 

Rate

Income Range

Basic Rate

20%

< £32,010

Higher Rate

40%

£32,011 - £150,000

Additional Rate

45%

> £150,000

 

You should also note that once your income reaches £100,000 the personal allowance is reduced by £1 for every £2 of additional income. This results in an effective rate of tax of 60% on incomes between £100,000 and £118,880.

 

Income from dividends is taxed at different rates from other income.

 

Basic Rate     10%

Higher Rate   32.5%

Upper Rate    37.5%

 

You should note that dividends are treated as being received net of a deemed (or “notional”) 10% tax credit.  Thus for a basic rate tax payer there will be no further tax to pay. 

 

Slightly bizarrely, the financial year runs from 6 April to the following 5 April.  Personal tax returns are then due by the following 31 January.

 

Most benefits received from an employer will be subject to both income tax and national insurance.

 

2.      National Insurance

 

National Insurance is payable on earned (wages, salaries, bonuses etc) and on self employment income, but not on other types of income such as dividends, interest and rents.

 

It is paid by both the employer and the employee.  The rates for employed earners are:

 

 

Bourne by the Employee

Bourne by the Employer

First £7,748

Nil

Nil

£7,749 - £41,444

12%

13.8%

Above £41,444

2%

13.8%

 

UK employers are obliged to operate the PAYE (Pay As You Earn) system.  Under this estimated income tax and national insurance charges are withheld by the employer and paid directly to the government. Any under or overpayments can then be settled up following the submission of a tax return.

 

3.      Capital Gains Tax

 

In general when an individual disposes of an asset – typically through either gift or sale – a capital gain will arise.

 

Each individual is allowed to make a gain each tax year that is not taxable.  The annual exempt amount is £10,900.  Any taxable gain above that amount which is taxed at 18% or 28% depending on total income.

 

There are various assets which are non-chargeable.  The most important of these is that a gain arising on the sale of an individual’s only or main private residence is exempt from Capital Gains Tax.

 

 

4.      VAT

 

Most goods and services sold by businesses with annual sales above £79,000 are subject to Value Added Tax. The standard rate of   VAT is 20%. 

 

The main exceptions to this are most food items (but not meals in restaurants or hot takeaway food), construction work on new homes, passenger transport, children’s clothes books, newspapers and periodicals.

 

There is also a lower rate of VAT of 5% which applies to a number of items, the most important of which is domestic fuel and power.

 

Businesses are in general able to reclaim the VAT that they pay when purchasing goods and services.

 

In general – unless the items are clearly expected to be sold to another business - the headline price that you see quoted will be the price including VAT. 

 

 

5. Inheritance Tax

 

Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone’s lifetime. Most estates do not have to pay Inheritance Tax because they are valued at less than the threshold of £325,000.

 

Married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000. Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.

 

 

5.      Corporation Tax

 

A company resident in the United Kingdom is liable to UK taxation on its worldwide profits.  A company incorporated in the United Kingdom is regarded as resident in the UK for UK corporation tax purposes.  A company incorporated overseas may be regarded as resident in the UK if its central management and control is exercised in the UK.

 

Rates of corporation tax

 

Small Companies – those with profits of less than £300,000 in a year are taxed at 20%. The rate then rises on a straight line basis so that by the time their profits are £1,500,000 they are taxed at the standard rate of corporation tax of 23%.

 

6.      Pensions

 

In general pension contributions whether made by the employee or the employer are made free from tax (and if made by the employer) are free from national insurance. 

 

The income and any capital gains within a pension scheme are free from tax, but the eventual pension is subject to income tax in the hands of the recipient.

 

There are limits in terms of both the total amounts that can be paid into a pension scheme each year and the total size of the accumulated investment pot. There are also new restrictions that limit the amount of tax relief to the basic rate. These are phased in on incomes between £130,000  and £180,000 per annum.

 

7.      Tax efficient investments

 

There are a number of tax efficient investment incentives. These include:

 

Individual Savings Accounts  (ISAs)

 

Up to £10,200 can be invested in an ISA per year of which £5,100 can be in cash.  Investments held within an ISA are free from both UK income tax and UK capital gains tax, although any interest earned in cash ISAs will be taxable income for US tax purposes.

 

Enterprise Investment Scheme

 

Up to £500,000 can be invested annually in certain qualified unquoted trading companies.  The amount subscribed is tax reduction saving tax at 20%.  If held for more than three years then, on disposal of the shares, any gain is exempt from capital gains.

  

Venture Capital Trusts (VCTs)

 

Up to £200,000 can be invested each year in a Venture Capital Trust (VCT).  Income tax relief is available of 30% of the amount subscribed, dividends eceived are also exempt from income tax.