The UK tax system is very complex and it would be impossible to educate you on all of the intricacies of each of the taxes without the explanations running to pages and pages. However the following should give you a brief overview of UK taxes so that you are at least aware of the terms used.
Income tax is paid by individuals on all income where ever it may arise; for example salary, interest, rent, dividends and profit from a business registered as self employed.
The income tax year runs from 6 April to 5 April each year.
Where applicable individuals would complete a self assessment tax return to record their income and the amount of income tax already paid, if any.
The return would be used to calculate any additional tax to pay or in some cases where a refund may be due.
Even if you earn below the personal allowance and no tax is due you may still need to complete a self assessment tax return; for example if you are operate a business and are registered as self employed.
Class 2 and Class 4 National Insurance
If you run a business and are registered as self employed then you may pay Class 2 and Class 4 National Insurance.
Class 2 National Insurance is levied at a fixed weekly amount whilst Class 4 National Insurance is paid as a percentage of your overall profits.
This is the tax paid by limited companies on the taxable profits made by the company.
A corporation tax return (CT600) along with a full set of accounts and a tax computation (calculation) must be sent to HMRC each year. An abbreviated set of accounts produced from the full set is separately sent to Companies House.
Tax on Dividends
You may receive dividends from your limited company. Dividends are paid from the company’s profits on which they have already paid (or are due to pay) corporation tax.
A notional tax credit is applied to the dividend to take account of the fact that corporation tax has already been paid. The tax credit is available to the shareholder to offset against any Income Tax that may be due on their ‘dividend income’.
The tax credit is a notional amount only. Nothing is due to HMRC and no further tax needs to be paid on the dividend unless the recipient is a higher rate tax payer.
Higher rate tax payers will pay a total of 32.5% tax (or more if a 50% tax payer!) on dividend income that falls above the basic rate Income Tax limit but because the first 10 per cent of the tax due on dividend income is already covered by the tax credit, in practice only 22.5% is owed.
PAYE (Pay as you earn) is a system of collecting income tax and national insurance from your wages, salary or occupational pension. This means that such amounts are received net of tax.
If you are an employer you will need a suitable payroll system that can calculate any income tax and national insurance due on your employees wages and salaries.
There are many returns which have to be filed by an employer. So if this is an area that you are not familiar with, it is strongly recommended that you get expert advice or attend a course on the subject.
VAT is a tax charged on most transactions in the UK.
When your business reaches a certain threshold then it will have to register for VAT.
This means from the date of registration you:
- must charge vat on all your relevant sales
- can reclaim vat where you have been charged it on your purchases
Basically you become an unpaid tax collector for HMRC as you pay to HMRC the VAT that you have charged on your goods or services less the VAT you have paid on your purchases.
There are many other taxes payable in the UK for example capital gain tax (CGT), Inheritance Tax (IHT) etc.
As these are specialist areas it is suggested that expert advice is sought on these taxes from a qualified accountant or suitably qualified tax specialist.