UK probably has one of the longest tax codes in the world. The annual changes to tax and duty form a law called the Finance Act and it may change the tax rates and principles set out in the main tax acts. Not surprisingly it is quite difficult to understand this complex system as a foreigner starting business in the UK. We will do our best to give a brief overview of the most important details in the following article.
In the UK the tax payments are usually made on two levels – the payments to the central government agency called Her Majesty´s Revenue and Customs (HMRC) and payments to local councils. The local councils collect a tax called „business rates“ from businesses and „council tax“ from households.
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
- The accounting period for a company: can be equal to the financial year, equal to the calendar year or any other given 12-month period
- Personal tax year: 6th of April to 5th of April
The basics of UK value added tax (VAT)
The VAT threshold in the UK is 85 000£ of non-VAT exempt income per financial year. Registration threshold for distance selling into the UK is 70 000£. It is possible to register for VAT voluntarily to reclaim VAT on purchases made before the threshold has reached.
In the UK there are 3 rates of VAT: standard rate (20%), reduced rate (5%) and zero rate (0%). Additionally, some goods and services are exempt from the VAT or outside the VAT system.
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 are always 1 calendar month and 7 days after the end of VAT accounting period. For this deadline, the payment must be received by HMRC.
VAT returns are to be submitted online and it is recommended to use a qualified accountant to do it.
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.
Since 1st April 2017, the corporate tax rate is 19%.
Limited companies must file their annual accounts with Companies House within 9 months from the end of the company´s financial year.
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 12 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
Becoming an employer in the UK means more taxes and more systems.
A business needs to register as an employer in HMRC to get access to a system called PAYE (Pay As You Earn). Each employer is legally responsible for completing all PAYE tasks, but it is possible and advised to use an accountant to complete the tasks.
Taxes that must always be deducted from employee salary are personal income tax and national insurance contributions. Additional possible deductions may be repayments of student loans or pension contributions.
The full payment submission (FPS) must always be submitted to HMRC BEFORE any salaries are paid out.
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 following month.
For small employers paying out salaries under 1500£ a month it is possible to pay the bill quarterly.
The national insurance contribution must be paid by businesses on each employee´s earnings above 155£ a week.
There are two types of contributions made. The primary contributions are deducted from an employee´s pay and secondary contributions are paid by the employer. The amount of both depends on the employee´s earnings and national insurance category letter. The meaning of different letters in an employee´s tax code can be found in governments website.
On current (2018-2019) tax year the contributions are normally 12% of the net salary for employees and 13,8% for employers.
It is required for all businesses to have Employers ‘Liability (EL) insurance as soon as they become an employer. This must cover the business for at least 5 million £ and must come from an authorized insurer. EL insurance covers the compensation in case an employee is injured or becomes ill because of the work.
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 11 850£ per tax year. If a person earns more than 100 000£ gross, the personal allowance will be reduced by 1£ for every 2£ earned. So, for incomes 120 000£ or more the personal allowance is zero.
The basic income tax rate is 20% and this will be applied to 0£-35 000£ of income earned above the personal allowance.
40% of income tax rate will be applied for 35 0001£ to 150 000£ of income earned above the personal allowance.
All income that exceeds 150 000£ will be taxed with 45%.
Also, there are different tax rates for dividend 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.
Business rates are also called non-domestic rates and are collected on a local level. It is a type of property tax that needs to be paid by tenants such as offices and shops on top of their rent paid to the landlord directly to the local council. Every business occupying a property must register with the local council even if the business rates are already included in the rent.
The rate is based on property occupation. The properties are in a national rating list by rateable value (RV). The value is not based on the current market price or the price agreed between in the tenancy agreement, but on assumptions of the annual rental value on a fixed valuation date. The current rateable value of the property can be checked here.
For current (2018-2019) financial year the national small business rate relief (SBBRR) multiplier is 48% and the standard rate multiplier 49,3%. This means that a small business with a rateable value of 10 000£ must pay 4800£ of local tax each year.
Additionally, to national rates, each local council can also set an extra rate on top of it.
There are certain conditions that must be met to be qualified as a small business.
A similar tax is also applied for households, then it´s called “council tax” and it must be paid by anybody who is renting or owning a home in the UK, is over 18 years old and not a full-time student.
So in conclusion – UK tax system is complex and complicated and in order to fulfill all requirements, it is advised to use local experts.