5 useful facts about the taxation system in the UK

US-PDGov

The majority of taxes assessed in the UK are at the national level. Taxes paid that are paid at a regional or local level include property taxes. The tax year for citizens in the UK are from April 6 of the current year to April 5 of the following year. Five facts may help to explain how the taxation system in the UK is set up for residents.

Assessment basis

Residents of the UK are taxed on capital gains and income they earn in and out of the country. The UK requires most residents to file a tax return based on a self-assessment. The only exception is for anyone who only has savings income and receives regular employment income. Individuals who are employed will be under a pay as you earn system. This is where taxes are withheld by the employer. Anyone who is self-employed will need to file a yearly tax return.

Income tax

Individuals who reside in the UK will be taxed on all income that is taxable. However, they will have a few allowances that are tax free based on their age and marital status. Certain allowable deductions are available that count against taxable income. This includes contributions to a pension and any donations to charity. If individuals or couples are over 65, then an additional tax free allowance is available.

Investment income

The majority of investment income earned by UK residents is taxable. This income will be added to all other income when an individual's tax liability is calculated. The tax rate applied to investment income will vary based on type and the applicable tax band. Tax bands are determined from the type of income and how it is earned, such as non-dividend savings and dividends.

Capital gains

This is a tax that applies when an individual sees a gain received over the annualized exception limit of the UK. Current capital gains rates are set at 18 percent and 28 percent as of June 2010. The actual rate that is applied is based on an individual's total taxable income. The higher rate will apply to a resident if their income and gains are above the base limit for the 2012/2013 tax year.

Inheritance tax

Individuals who receive gifts or assets from a family deceased family member will be assessed the UK inheritance tax. This is tax on the total value of an inheritance received by a beneficiary and will be set at a rate of 40 percent. However, the first 325,000 pounds are subject to this tax until 2015. If there is a sum of the estate of a deceased person left to charity, then a 36 percent tax rate will apply. The transfer of gifts between spouses will typically be exempt from the inheritance tax.

Additional information

The value added tax in the UK is added to the price paid for goods and services and increased on January 4, 2011 to 20 percent. Individuals who have rental income will have it applied to their income tax.

About the author: Sally is a content writer for Francis Clark Tax Consultants, a business based in South West England who provide a UK tax advice for their clients, visit FCTC.co.uk to find out more about their tax services.

A guide to the U.K.'s flat rate VAT

The U.K. Flat Rate VAT scheme was introduced in the year 2002 and it provides the small businesses in the UK with the chance to simplify VAT accounting. In order for the business to qualify for the scheme, certain requirements must be fulfilled.

• An yearly exclusive VAT taxable turnover of £100,000.

• An yearly VAT exclusive turnover that is inclusive of the value of the exempted supplies and also other incomes that are non taxable up to an amount of £125,000.

• The annual VAT inclusive turnover of the business should not exceed an amount of £150,000. If this happens, the business is required to exit the scheme since it will prove costly.

The working principle

Companies with zero expenses

For example, if the turnover of the business is £51,000, the VAT will be charged as below:

£51,000 x 0.175 = £8,925.

The total revenue will therefore stand at £59,925. The percentage of the VAT flat rate is applied directly to the figure mentioned. For example, if there is an assumption that the flat rate percentage is 15 percent, then the calculation will be as follows: £59,925 x 0.15 = £8,988.75.

The amount of £8,988.75 must be paid of to the HM customs and Excise as tax. Notably, there is a difference of £63.75 between the total amount that is charged for the supply of the services and goods (£8,925) and the amount that is paid in the form of tax (£8,988.75). This implies that if the company has got minimal or no expenses, it would have gained £63.75 by the close of the financial year.

Companies with several expenses

In the situation whereby the company has got numerous expenses during the year, it is wise to avoid the VAT Flat Rate Scheme. This is due to the fact that the business would be in a position to offset the VAT that was paid on the costs against the amount of VAT that was received for supplies of both services and goods.

For instance, if the company makes a sales turnover of £50,000 and incurs expenses of £15,000, the expenses will be as follows:

£15,000 plus £2,625 = £17,625

It is possible to offset the figure of £2,625 against the amount of £8,988.75 that was charged for services and goods.

The £2,625 can be offset against the £8,750 of VAT charged for the supply of goods or services: £8,925 - £2,625 = £6,30. Therefore, the amount of money that is paid out in form of tax would be £6,125. This figure is less that the £8,988.75 that was paid as the VAT Flat Rate that was shown in the example. In such a situation, the company should avoid being in part of the Flat Rate VAT Scheme.

It is therefore important for the company to seek the services of professionals who are better placed to provide the best advice about VAT tax related issues. Otherwise, without a clear understanding of how the figures are arrived at, it may become rather difficult to make the best decision.

About the author: Isaac writes for Drummond Bookkeeping & Accountancy Services LLP, Drummond provide their services to the wider South West region but focus on providing bookkeeping in Plymouth for small and medium sized businesses.