Global expansion is a great way to grow your business and the UK offers many appealing opportunities. However, the tax laws can be complex and require time-consuming research. By using our PEO-service we will take care of the complicated legwork so that you can focus on your business goals in Britain.
Britain is seen as a world leader in innovation and boasts to have one of Europe’s most flexible labor markets. The country also offers many unique tax opportunities for international businesses, such as low corporate tax, favorable double taxation treaties, favorable withholding taxes on interests and royalties, and more. The country also benefits from a well-educated workforce, low-cost business environment, and low costs of living.
We have made it our goal to keep track of the latest changes in the tax policies to always ensure complete compliance. To keep you informed and updated too, we created this guide which includes the basic facts regarding tax regulations in the UK.
Overview of UK Tax
- Individual Income Tax - Progressive
- VAT - 20%
- Corporate Income Tax - 19%
- Employer & Employee Social Security Contributions - Depends on employee’s income and category
- Capital Gains and Withholding Taxes - 20%
Individual Tax UK - Single, Married
In the UK, an individual’s liability to pay income taxes is determined by their residency status and the source of their income. UK residents are taxed on their worldwide income, whilst non-residents are only taxed on certain types of income that are derived from local sources.
Personal Income Tax in the UK is progressive, based on the amount of income an individual has earned:
- £0 - £12,570 - 0%
- £12,571 - £50,270 - 20%
- £50,271 - £150,000 - 40%
- £150,000 and over - 45%
The first tax rate is known as the Personal Allowance, where no tax is requested on income that is under or equals to £12,570.
The amount of income tax that is paid in a tax year depends on two factors:
- How much of the individual’s income is above the Personal Allowance rate.
- How much of an individual’s income falls within each tax band.
An individual’s income tax is normally withheld from an individual’s salary under the PAYE system. However, not all earnings may be subject to PAYE, but there are a number of special schemes and reliefs that may be used to help limit the PAYE earnings or operate the earnings on an estimated or annual basis. In some cases, the obligation to operate PAYE is also removed.
An individual is also required to pay social security contributions, which are known as national insurance contributions – they must be withheld by employers and paid by the end of the following month.
Individuals are taxed on their employment income, with certain tax-free allowances on other sources of income such as dividends, savings interest, and the first £1,000 of income from self-employment or renting property.
The country also operates under a self-assessment tax system – however, one may still need to complete a tax return, which is issued by the HMRC each year. Married couples are independently taxed, and each person must file their own return.
Tax returns must be filed and paid by the 31st of January following the end of the tax year. For those filing on paper, the filing deadline is brought forward to the 31st of October after the end of the tax year, which are now only being accepted under certain circumstances (in a move to being fully online).
In order to be eligible for filing tax returns, one must be registered with the HMRC – Her Majesty Revenue and Customs - and receive a tax code. Tax filing is now mostly done online through your personal tax account, which is done through the government website Gov.uk.
UK Individual Tax Rules
In the UK, the tax year starts from the 6th of April ends on the 5th of April the following year. An individual’s residency depends on how long they have spent in Britain during the tax year. If you are a resident, you must pay taxes on your worldwide income – and as a non-resident in the UK, you are only subject to paying taxes on your income derived in the UK.
Individuals can check if they meet residency status if they meet the following conditions, known as the ‘automatic residence test’, which forms part of the statutory residence test (SRT):
- You spent at least 183 days in the UK in that tax year
- Your only home is in the UK, which must have been owned, rented, or lived-in for at least 91 days in total, and spent at least 30 days in the home during the tax year.
- The individual works full-time in the UK for the period of 365 days with no significant breaks from work, and a significant part of this work falls within the tax year. The work must also average 35 hours or more during that period.
Payments for income tax are expected monthly through the PAYE system, and must be paid by the employer to the HMRC by the 22nd of the following month (when paid electronically).
Annually, an employer must also submit a Full Payment Submission (FPS) report, which must in sent in real time, on or before the employee’s last payday of the tax year. This may also include a ‘week 53’ payment, which your payroll software will work out for you. In your FPS form, you must fill your ‘Tax week number field’ with the following numbers:
- 53’ – if employees are paid weekly
- ‘54’ – if employees are paid fortnightly
- ‘56’ – if employees are paid monthly
Employees must also be provided with a P60 form which summarizes their earnings and tax deducted in the previous tax year.
VAT, Excise Duty, etc.
VAT rates in the UK depend on the type of service that is being offered, but they are obligated to be paid by individuals for their services. The standard VAT rate is 20%, which applies for most goods and services.
There is also a reduced rate of 5% for some goods and services, such as home energy, and a 0% rate for zero-rated goods and services, such as most types of food and children’s services.
There are also some products and services which are exempt from VAT, such as postage stamps, financial transactions, and property transactions.
Employers Social Security and statutory contributions
In the UK, besides income tax, social security and statutory contributions are settled through the employee’s salary - where social security contributions are withheld from the salary every month and paid to the HM Revenue and Customs, as well as the employer’s own monthly contributions.
National Insurance contributions of both the employer and employee depend on the category that the employee is in, which consists of:
- Category A
- Category B – Married women and widows who are entitled to pay reduced National Insurance
- Category C – Employers over the State Pension Age
- Category H – Apprentice under 25
- Category J – Employees who may defer National Insurance because they are already paying it at another job
- Category M – Employees under 21
- Category Z – Employees under 21 who may defer National Insurance because they are already paying it at another job
For Class A, which is the standard rate of NIC contributions, they are split as so:
Employer’s Social Security Contributions
- £520 - £737 per month - 0%
- £737.01 – £4,189 per month - 13.8%
- Over £4,189 per month - 13.8%
Employee’s Social Security Contributions
- £520 - £797 per month - 0%
- £797.01 - £4,189 per month - 12%
- Over £4,189 per month - 2% on the remaining amount
Employers are liable for payment of social security contributions and personal income tax, and the filing of the monthly social security contributions.
UK Corporation Tax
Corporations in the UK are taxed according to their residency. Resident companies are subject to UK corporation tax on their worldwide trading profits, whilst non-resident companies are subject to UK corporation tax on the trading profits of a UK permanent establishment and those attributed to a trade of dealing in or developing UK land and income which is received from UK property.
The standard corporate income tax rate in the UK is 19%.
However, in the case of taxable profits attributed to the use of patents, and a lower rate of corporate tax applies, at a rate 10%.
The tax period for corporations is the same as for income tax – 6th of April to the 5th of April the following year. Companies must file statutory accounts and tax returns within one year from the end of the accounting period. Returns must be done by self-assessment and filed online.
For smaller companies, tax payments are paid nine months and one day after the end of the accounting period. For larger companies and groups, a system of quarterly payments is in place, with the first payment due in the seventh month of the company’s accounting period.
Corporations must also pay a Diverted Profits Tax, which was introduced in 2015 as a response to the shifting tax environment in the UK. It is separate from other corporate taxes and is levied at 25% on diverted profits. Diverted Profits Tax applies in two circumstances:
- For groups who create a tax benefit by using transactions or entities lacking economic substance, so the insufficient economic substance condition is met in creating an effective tax mismatch outcome.
- For foreign companies that have structured their UK activities to avoid being marked as a UK PE, so the tax avoidance condition is met in creating an effective tax mismatch outcome.
However, the following terms do not apply to the DPT rules:
- The parties are both small and medium-sized enterprises
- Where the tax mismatch arises from loan relationships
- Transactions that involve the receipt of payments by the following bodies: pension funds, person with sovereign immunity, certain investment funds, and charities
Capital Gains & Withholding Tax
In the UK, there are no withholding taxes on dividends, but there are withholding taxes on annual interest and royalties payments, which are at a rate of 20%.
The UK also benefits from Double Taxation Treaties, which may greatly subsidize withholding payments on interests, and patent, copyright, and design royalties.
In the UK, tax deductions and exemptions are as follows:
- Social security contributions are exempted
- Trading companies may deduct expenses that have incurred for the sole purpose of the company’s trade, provided that they were not capital in nature and charged to the profit and loss account.
- Funding costs are generally deductible on an accounts basis, even if they are capital in nature – but they are also subject to thin capitalization constraints, hybrid mismatch rules, and corporate interest restriction rules.
- Bad debts, provisions and reserves are deducted for tax purposes under certain circumstances, such as being in respect of allowable revenue expenditure, and are made in accordance with acceptable accounting practice.
- Most charitable donations by companies are also tax deductible.
Stamp duty in the UK is imposed if you buy property or land that is over a certain price in England and Northern Ireland. In the case of Scotland or Wales, stamp duty tax is labeled as Land and Buildings Transaction Tax or Land Transaction Tax, respectively.
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