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Understanding the UK tax system
Taxes in the UK include income taxes, property taxes, capital gains taxes, UK inheritance taxes and Value Added Tax (VAT). Many of these taxes are classified based on what what an individual’s ability to pay is; higher income people will pay a greater proportion of tax than individuals in a lower income bracket.
The tax system of the UK is active throughout the whole of the country, including Scotland which incidentally does have some differences as a result of its unique legal system. Additionally, commercial oil platforms in UK waters are also included within the UK tax system, although the Channel Islands, the Isle of Man and the Republic of Ireland are excluded.
Spouses are considered a separate entity within the rules of UK taxation, and are treated and taxed as individuals. They do however get a small allowance for the purpose of income taxes.
The UK tax year
Starting on 6 April, the UK tax year runs until 5 April the following year. As such, UK tax years are usually formatted as 2018/19 for the current tax year.
Who has to pay taxes in the UK?
Every individual in the UK is subject to the same rate of tax, whatever their residency status may be. Despite this, your residency status does have an impact on what sources of income need to be included in your taxes. For example, if you are a resident of the UK purely for tax purposes, then your finances will be taxed according to your worldwide income. Don’t worry too much about being taxed from another country (double taxation), because there are measures within UK tax law to prevent this.
Calculating your tax
Knowing what you owe the taxman depends on your own unique situation. Using this calculator, you can get an estimation of your tax liability, as well as check your tax code and Personal Allowance.
Which aspects of my income can be taxed?
If you are a UK resident for tax purposes, then your worldwide income (foreign investments, savings interests, rental income on overseas properties) are susceptible to taxation under UK tax law. If you’re working in the UK but are not a UK resident, then you’ll only be taxed on income earned within the UK (which includes capital gains, rental income and dividends).
Types of tax in the UK
Gaining an understanding of the various different types of UK tax is important, because it means you’ll be better prepared if something goes wrong. Below is brief run-through of the various UK taxes, but if you require more information then contact our team of experts now on 020 3376 1888.
Rental income tax
Capital gained from renting property in the UK is classed as a form of income under UK law, for both residents and non-residents alike. There are separate rules for things like renting out a single room, or renting out a whole property for holiday purposes, and for foreign nationals acting as overseas landlords.
One thing you should note is that the UK disallows most capital expenses against rent. This includes the cost of buying a property, improving it, as well as he cost of depreciation and mortgage interest.
UK Property Taxes
The UK tax system includes two types of property tax in the UK; Stamp Duty Land Tax (SDLT) and Council Tax. SDLT apples primarily to residential properties with a value exceeding £125,000, and to non-residential properties purchased for more than £150,000. Capital tax covers property taxation at a municipal level and is stepped or banded much like income tax. Local municipalities assess the value of the properties in their area and allocate a tax accordingly.
Capital Gains Tax
From the UK government website:
“Capital Gains Tax (CPT) is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value”.
CPT taxes the gain you make from selling an asset, not the total amount of money you receive. For example, if you purchase a work of art for £3000 and sell it for £33,000, then the gain is £30,000 and this is susceptible to CPT.
In the unfortunate event of a loved one’s passing, individuals must be prepared to deal with the inevitable Inheritance Tax which is likely to affect the contents of a will. Inheritance Tax is a one time only payment on a deceased’s estate if the value of the estate exceeds the threshold, which is presently £325,000.
There are a few ways around this though; for example spouses can gift their estate to one another in the event of death and thus avoid paying UK inheritance tax.
Car and Road Tax in the UK
All drivers in the UK need to pay Car and Road Tax in order to continue legally using their vehicle on UK roads. The amount of tax you pay varies according to vehicle type, engine size, type of fuel used and CO2 emissions. If you’re curious about what UK road tax rates currently are, then you can use this helpful guide available on the government website. Additionally, you can use the government website to pay your car tax, available here.
Regarding emission taxes, if you want to avoid paying anywhere between £130 and £450 a year, then you might want to consider moving to an electric motor as they are exempt from UK taxation.
Self-employment and Corporation Tax
If you are self-employed then it is essential you register with the HMRC in order to avoid taxation issues further down the line. Also, be aware of the different types of National Insurance tax you’ll have to pay; Class 2 if your profits are £6,205 or more a year, Class 4 if your profits are £8,424 and above.
Corporations in the UK are generally taxed at a rate of 20% on their net profits. They’ll have to file a separate company tax return and be aware of what allowable expenses they can get away with. These include office supplies and other essential items used in daily work life; anything purchased for personal use must be treated as a benefit (of which you might also have to tell HMRC about).
The amount of Corporate Tax that can be applied depends on the company’s profit level. It is applicable to the profits made doing business as a foreign company with a UK branch or office, a limited company, or if you are a club or other unincorporated associate (sports or community club for example).
Value Added Tax (VAT)
Also known as commercial tax, VAT is applied to the majority of goods and services in the UK. It can also be applied to goods brought in from abroad that exceed the duty-free allowance. VAT’s standard rate in the UK is 20%, but there are a few exemptions that are subject to lower VAT rates. These include children’s car seats, home energy and smoking cessation products. The idea behind this is that the government wants to lower the burden of VAT’s effect on aspects of social responsibility. Specific items such as long-term medical supplies can also benefit from the lower VAT rates.
Owning shares in a UK company means you could get a dividend tax payment. Thankfully, dividends received in the first year that are below £5,000 aren’t susceptible to dividend tax. The dividend tax rates in the UK are:
|Tax band||Tax rate dividends over £5,000
|Higher rate ||32.5%
Whatever your taxation issue may be, it is likely that any legal procedures will be complicated and potentially expensive. If you’re worried about the legal fees involved with a taxation law case, then you should speak to our finance experts about our range of convenient payment plans. Call them now on 020 3376 1888 and start your payment plan with Legal Cost Finance.
With a payment plan, you never have to compromise on the quality of legal advice and representation.
We provide payment plans to cover your legal costs, so you or your business can get the legal support you require – without the need for large up front payments.
Your legal process can involve negotiation, litigation or alternative dispute resolution (such as arbitration or mediation).
We will connect you with a lawyer who specialises in tax law and who is right for your individual circumstances. If you have already appointed a lawyer, we can still offer you a payment plan solution and will make all the necessary arrangements with your lawyer on your behalf.
How can we help?
We have a team of dedicated case managers who will guide you through your legal journey and ensure you’re not wasting money on legal costs and making the right strategic decisions.
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