Income tax – United Kingdom (UK)

I am on a series of articles to explain basically the income tax of top 25 GDP countries which invite most of the Indian exporters/experts from India who help these countries to grow, prosper, and distribute wealth among those associated with them.

It is time for United Kingdom economy to get the priority.

Income tax U.K.

The Government website

 https://www.gov.uk/income-tax

invites you to learn the basics. The current tax year is from 6 April 2021 to 5 April 2022.

On what does one pay income tax?

•  Earnings from employment
•  Profits one earns from self- employment including services sold on websites or apps.
• Some state benefits
• Grants and support payments made to any one or his/her business due to calamity like self-employment income support scheme, the Coronavirus job retention scheme, the small business grant fund or the retail, hospitality and leisure grant fund.
• The Test and Trace Support Payment in England (or the Self-isolation Support Payment in Scotland and the Self-isolation Support Scheme in Wales)
• Most of the pensions, including state pensions, company and personal pensions, and retirement annuities.
•  Obviously, the rental income unless one is a live-in landlord and get less than the rent a room limit)
• Benefits one gets from job
• Income from a trust
•  Interest on savings over one’s savings allowance.

But what about those which do not attract tax?

• Trading allowance which is £1,000 of income from self – employment.
• The first £1,000 of income from property one rents unless one is using rent a room scheme.
• Interestingly income from tax-exempt accounts, like individual savings accounts (ISAs), and national savings certificates.
• Dividends from company shares under one’s dividend allowance.
• Some tax benefits which are not taxable, premium bond or national lottery wins (Yes, repeating, some national lottery wins are tax – free; obviously, your tax consultant will help you)
• Rent one gets from a lodger in the house that’s below rent a room limit.

With one of the most attractive income tax rules, we are tempted to know the tax slabs, and other details.

Income tax rates and bands

The following table shows the tax rates one pays in each band if one has a standard personal allowance of £12,570.

Yes, I shall give details of income tax bands in Scotland separately.

One does not get a Personal Allowance on taxable income over £125,140.

Like yourself, I am keen to learn about tax bands in Scotland.

What will one pay in Scotland?

What you’ll pay

The table shows the 2021 to 2022 Scottish Income Tax rates you pay in each band if you have a standard Personal Allowance of £12,570. One does not a personal allowance if the earnings are over £125,140.

More important information from government’s web site.

What about capital gains tax?

One pays Capital Gains Tax on the gain when it is sold or disposed of. We learn that:

• One pays capital gains tax if the transactions occur on personal possessions worth £6,000 or more, apart from your car.
• Property that is not main home for residence
• One’s main home if it was let out, used for business, or it is very large.
• Shares that are not in an ISA or PEP.
• Business assets.
• Please do check up with tax authorities whether to any capital gains tax on crypto assets when they are sold or given away.
• The above assets are also known as chargeable assets.

One comes across gift as a tax item. Is it so?

Some gifts are exempt from Inheritance Tax especially those made more than 7 years before the person died. However, not all gifts are exempt.

Most gifts a person makes during their lifetime — except gifts covered by an exemption — are called potentially exempt transfers. This is because a gift is exempt from Inheritance Tax if the person survives for 7 years after giving it.

More information for an in- satiating mind.

• Marriage allowance allows one to transfer £1,260 of the Personal Allowance to one’s husband, wife or civil partner. It’s free to apply for Marriage Allowance. This can reduce the tax by up to £252 every tax year (6 April to 5 April the next year).
• Expenses which you claim if you are self- employed: Let me quote from the government website with some explanations – office costs like stationery, or phone.
• Travel costs which may include fuel, parking, train, or bus fares.
• Expenses used for uniforms for employees.
• Obvious expenses for payment of salary for employees, or subcontractor costs.
• Simple to understand items like stock, raw material costs, bank expenses, insurance cost for business or costs involved in heating, lighting, advertising, or marketing, web-cost.
• HRD costs like training, refresher courses etc.

It is understandable that one can’t claim expenses as well as avail £1,000 tax-free ‘trading allowance’.

Let us have some more information on business related tax.

What does one claim as capital allowances?

By using traditional accounting, one can claim as capital allowances on buying of equipment, machinery, business vehicles like cars, vans, or lorries.

If one uses an asset personally as well as for business purposes, that proportion of expenses for business gets duly recognized for business.

With Covid related developments, working from home with proportionate share of expenses for business purposes gains importance. Some of them of prominence can be heating, telephone/internet expenses, rent, electricity, mortgage interest on property etc.

The website of the government of U.K. contains 45 items of business-related ones for easy understanding for medium and big business.

What about accounting period for corporation tax?

Corporate tax return covers the accounting period for corporation tax. Yes, I agree with you that it can’t be longer than 12 months and the same as financial year covered by the company or any association’s annual accounts. The accounting period defines timelines for paying corporation tax by sending or filing a company tax return.

Conclusion

The purpose of this article is to give you a bird’s view of the simple tax system in U.K. which houses one of the top economies with business going back to centuries. Most of the Indian systems/business/legal models simply mirror UK’s economy and have shown enormous growth. My next article will totally deal with U.K. business only.

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Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting because of the above write up. The possibility of other views on the subject matter cannot be ruled out. By use of the said information, you agree that Author/Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.