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What are the UK rates of tax ?

November 28, 2017

The UK tax system confuses a lot of people but it’s relatively straightforward and the sign of a good accountant is one who can explain it clearly and simply. Let’s start by looking at what is called direct tax. Its not voluntary as a famous old comic once said.

Those who are employed and also self employed pay tax at 20,40 and 45% depending on total income received and everyone starts with a £11,000 tax free allowance which is actually a lot more generous than in many other countries. The UK tax system works on an April to April tax year through an annual system called self assessment.

 

Those who operate Limited companies pay annual corporation tax at 20% on their profits and this will be reduced from 2017 to a rate of 19%. Limited companies operate through accounting years which are normally one year in duration but with a different end of year date depending on when the company was set up.

Individuals with limited companies can then extract their profit to live on by a combination of a salary and dividend. Everyone now has a £5000 dividend tax free allowance after which dividend is taxed at 7.5% up to a level of income received of £43,000.

 

The next earnings level £100,000 when incremental income basically starts to wipe out the £11,000 personal allowance and finally £150,000 at which point income tax rises to 45% for incremental income earned over that level.

Dividend extraction then becomes incrementally more expensive as each extra £1 of dividend after this level is taxed at 32.5%.

 

There are other taxes such as capital gains tax which is applied to an individual’s assets when sold. The rates are 10% for those in the 20% tax bracket and 20% for those paying higher tax rates but the profit on sale of property other than your main residence is taxed at slightly higher rates.

Inheritance tax applies to a person’s estate when they die and is 40% charged incrementally on values in excess of £325,000. There are a number of reliefs to this tax and the best way to think of it is that for a married couple or civil partnership an estate value of £1miilion or less will not attract any inheritance tax.

 

Finally indirect tax is VAT and it applies automatically to any businesses with sales above £83,000 and its basically a sales tax with businesses needing to increase prices by 20% from the day they register.

We love explaining the tax system to our clients and new business owners so pop in have a drink and a biscuit and we promise you will leave the wiser.