Taxation

Income tax Capital gains tax Corporation tax Other taxes

Income tax
Charged on receipts of income (as distinct from capital receipts) Tax year (fiscal year/year of assessment) runs from 6 April until following 5 April Taxable income includes:
earnings from employment earnings from self-employment most pensions income (State, company and personal pensions) interest on most savings income from shares (dividends) rental income

 Exemptions include
Gambling profits Social security benefits Income from certain authorised saving schemes eg Individual Savings Accounts ISAs Rental income from a lodger (up to 4,250 a year)

 Tax reliefs available on certain expenses

Pension contributions (approved schemes)

Fringe benefits included in income eg:

Living accommodation Medical insurance premiums Company cars Car fuel

Tax rates 20010/2011

Taxable Income

Tax rate

First 37,400
37,401 150,000 Over 150,000

20% Basic
40% Higher

50% Additional

 Pay as you earn (PAYE)

Employees have tax deducted directly by employers (using tables)

Tax allowances deducted before calculating tax liability:

Personal allowance Married couples allowance Age related allowances Blind persons allowance

Example
DW is a self employed lecturer. She earns 80,000 in 20010/2011
Income Less allowances: personal allowance 6,475 80,000

Taxable income Tax payable: First 37,400 @20% Balance (73,525 37,400) @ 40%

73,525

7,480

14,450 21,930

Total tax due

Capital Gains Tax

Paid by individuals and companies Most assets are chargeable exceptions:
Private motor cars Main private residence Foreign currency (personal use) British government securities

Chargeable gain sale price less the purchase cost (less any reliefs and allowances)

 Sale price can be reduced to reflect any selling costs Purchase price can be increased by any extra purchase costs Any enhancement expenditure can be included in calculation Capital losses can offset capital gains in the same year, or future years Exempt amount per taxpayer 2010/2011 = 10,100 Tax was charged at a flat rate of 18% Since June 2010 it varies between 18% and 28% depending on individuals taxable income

Corporation tax
Paid by companies on their taxable profits Tax year is 1 April-31 March If rate changes, applied to relevant parts of companys financial year eg 1 jan___________________31dec 25% 28% Most companies pay 9 months after the end of the companys accounting year Large companies must pay on a current year basis in quarterly instalments

 Not all business expenses are allowable for tax:

Entertaining Gifts to customers (unless very small) Donations to political parties

Capital allowances are given instead of depreciation Rate of tax varies depending on amount of taxable profits sliding scale ranging from 21% to 28% Need to have profits of 1.5m to pay full rate Losses from one year can be carried forward to offset future profits

Per financial statements:

Revenue Less expenses: depreciation interest paid entertaining other expenses Profit before tax 000 20,000 3,000 1,000 2,000 8,000 6,000

Per HMRC:
Profit before tax Add back: depreciation entertaining Taxable profit Less: capital allowances 6,000 3,000 2,000 11,000 2,000 9,000

Tax due: 9m x 28% = 2.52m

Double taxation relief

Agreement with many countries allowing individuals and companies to offset any tax paid abroad against UK liability Avoids paying tax on the same income twice Applies to CT and IT (not CGT) Maximum offset is amount that would have been paid in UK

Other taxes
National Insurance
Paid by individuals whether employed or self-employed Exemptions for very low-paid Paid by both employee and employer
Employees 11% on weekly pay between 110 and 840, and 1% on balance Employers 12.8% on total pay

Contributions pay for state retirement pension, maternity pay, incapacity benefit, etc

 Inheritance tax
Payable on estates of more than 325,000 No tax to pay if estate is inherited by spouse or civil partner Includes gifts made in 7 years prior to death Some gifts exempt, including
Gifts between spouses and civil partners Gifts to charities Gifts less than 250 Gift up to 5,000 on childs marriage

Tax payable at flat rate of 40%

 Stamp duty
A tax levied on documents levied on documents. Historically, this included the majority of legal documents such as cheques, receipts, marriage licences and land transactions. A physical stamp was attached to or impressed upon the document to denote that stamp duty had been paid before the document was legally effective Modern versions of the tax no longer require an actual stamp Charged on certain documents relating to UK property or share transactions Varies from 0.5% - 5%

 VAT
Tax on consumer expenditure VAT is payable if supplies of goods or services are:
Made in the UK By a taxable person In the course of business And are not specifically exempt or zero-rated

Taxable person is an individual or company which makes taxable supplies over a certain value (currently 70,000) Rates of VAT
Standard rate 17.5% Reduced rate 5% Zero rate

 Reduced rate supplies include:

Domestic fuel or power Renovation and alteration of houses Childrens car seats

Zero-rated supplies include:

Childrens clothes and shoes Certain exports Food and drink (unless luxuries)

Exempt supplies include:

Burial/cremation Education provision Medical and dental care

 How VAT works

Businesses pay VAT on goods which they buy for resale (input tax) They then charge customers VAT on goods and services sold (output tax) The difference between output tax and input tax is then remitted to C&E If ouput tax is less than input tax, difference can be reclaimed from C&E