UK tax system is quite complex, so it is necessary to learn some basic rules to keep your company in good standing. We have gathered
the most important information about taxes in the UK and wrote an overview of the main rules you should know.
The difference between financial year, accounting period and personal tax year
All these terms must be understood when starting a business in the UK. Unfortunately, all these periods are different, which makes it a little difficult to keep track. The periods are following:
- Financial year: 1st of April to 31st of March
- Accounting reference date: The financial year for most limited companies is 12 months, except for the first year after company formation. The first financial year for most companies is slightly longer than 12 months because the accounting reference date falls on the anniversary of the last day of the month of incorporation.
- Personal tax year: 6th of April to 5th of April
The basics of UK value-added tax (VAT)
You must register your business for VAT if your VAT taxable turnover is more than £85,000. It is possible to register for VAT voluntarily if your turnover is less than £85,000.
Once registered, you must charge the correct amount of VAT. In the UK there are three rates of VAT: standard rate (20%) applies to most goods and services, reduced rate (5%) and zero rate (0%). Additionally, some goods and services are exempt from the VAT or outside the VAT system. You may be able to reclaim the VAT on purchases that relate to these sales.
Usually, a VAT returns need to be submitted every three months. These 3-month periods are called “VAT accounting periods”. Each business can choose the period when registering for the VAT with HMRC. The filing and payment deadline for the VAT returns is always 1 calendar month and 7 days after the end of a VAT accounting period. For this deadline, the payment must be received by HMRC.
If you run a VAT-registered business with a taxable turnover above the VAT registration threshold (currently £85,000) you are required to keep digital VAT business records and send returns using Making Tax Digital (MTD)-compatible software. The vast majority of businesses need to do this for VAT periods that started on or after 1 April 2019. Businesses with a taxable turnover below the VAT threshold can also sign up for MTD for VAT voluntarily. VAT returns are to be submitted online and it is recommended to use a qualified accountant to do it.
Businesses who are not resident in the UK i.e. those do not have a business establishment in the UK, and also in the case of companies that are not incorporated in the UK, but who make taxable supplies, sales to unregistered persons in the United Kingdom, or acquisitions of goods in the UK above the relevant limits, may be required to register an account for VAT in the UK. A zero VAT registration threshold applies for businesses not established in the UK.
The corporation tax in the UK
A UK limited company must pay corporation tax on all its profits from the UK and abroad. A foreign company with an office or a branch in UK must pay corporation tax only on profits from its UK activities. The taxable profits include trading profits, investments and chargeable gains from selling assets.
The corporation tax rate remains at 19% for the year starting 01 April 2020.
Limited companies must file their annual accounts with Companies House within 9 months from the end of the company´s financial year. Due to Covid-19, there has been an extension of these dates. If your company’s filing deadline falls any time from 27 June 2020 to 5 April 2021 (including these dates) this will be extended by 3 months, from 9 months to 12 months.
If the profit of the limited company is under £ 1,5 million, the tax must normally be paid 9 months and 1 day after the company´s accounting period ends and file the tax return with HMRC12 months after the company´s financial year ends.
If the profit is over 1,5 million £, the tax must normally be paid in four equal installments.
Employment taxes in the UK
As an employer, you normally have to operate PAYE as part of your payroll. PAYE is an HMRC system to collect Income Tax and National Insurance from employment.
Other than employers’ national insurance contributions (NICs), there are no other payroll taxes, the business has to pay. However, employers must deduct income tax and national insurance contributions from employee’s salaries. Additional possible deductions may be repayments of student loans or pension contributions.
The full payment submission (FPS) must always be submitted to HMRC every time an employer pays their employees.
The deadline for paying the PAYE bill for all the salaries paid during the previous month to HMRC is the 22nd of each month. The month, in this case, does not mean a calendar month, but a period between the 6th date of a month to the 5th of the following month.
If you are a small employer that expects to pay less than £1,500 a month to HMRC for PAYE taxes, you can arrange to pay quarterly.
National Insurance contributions are a tax on earnings paid by both the employees and employer. In the current tax year (2020/21) the rate of contributions is 12% of the net salary for employees and 13.8% for employers.
National insurance contribution must be paid by businesses on each employee´s earnings above £169 a week (2020/21). The employment allowance reduces the amount of employer NICs payable by some businesses up to the allowance limit (currently £4,000 per year). From April 2020, the reduction is only available to organizations with a total NIC bill below £100,000. This means at least 90% of small businesses can claim the allowance.
Personal income tax in the UK
The rate of income tax a person must pay depends on their personal allowance and how much of their earned income exceeds it in the tax year.
Tax-free allowance for all UK residents is £12,500 (2020/21). If an individual’s total adjusted income exceeds £100,000, the personal allowance will be reduced by £1 for every £2 earned, until the allowance reaches £0. Anyone with an income above £125,000 will lose their personal allowance.
The basic income tax rate for 2020/21 is 20% and this will be applied to £0-£37,500 of income earned above the personal allowance.
40% of the income tax rate will be applied for £37,500 to £150,000 of income earned above the personal allowance.
All income that exceeds 150 000£ will be taxed with 45%.
There are different tax rates for dividends and savings income.
Self-employed sole traders, partners in business partnerships and company directors must register for a self-assessment tax return and sending a self-assessment tax return is required even if there is no tax to pay.
Learning these basic principles will help you navigate better in the UK tax system. If you need help with tax registrations, then see our service here.