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UK Taxation Explained

UK Taxation Explained

If you are setting up a company in the UK it is helpful to have a grasp of the tax regime. Unfortunately the UK tax regime is not one of the country’s many benefits, but by managing it well you won’t have a problem. Hiring a professional UK accountant, which is no doubt what you have already done, is the best way to handle all your taxation, although it is still a good idea to be aware of your tax liabilities yourself.

If you are setting up a company in the UK it is helpful to have a grasp of the tax regime. Unfortunately the UK tax regime is not one of the country’s many benefits, but by managing it well you won’t have a problem. Hiring a professional UK accountant, which is no doubt what you have already done, is the best way to handle all your taxation, although it is still a good idea to be aware of your tax liabilities yourself.

Below is an outline of the various types of tax, their rates, and who they apply to. Getting a grasp on this tax information will help you with other aspects of your business, such as planning your budget, and make sure that you aren’t paying more tax than you should.

Firstly, Corporation Tax:
This applies to all companies that are UK residents and is paid on the worldwide profits of the company. The current Corporation Tax rate is 24%. This has fallen consistently from 2010 and is likely to fall again to 23% next year.

There are reductions of Corporation Tax available for certain companies: if your annual turnover is less than £300,000 you can qualify for a small profits rate of 20%.

Secondly is Personal Tax:
This is similar to Corporation Tax, but as the name implies, it applies to individuals. So if you are a UK resident individual, you qualify to pay Personal Tax on your worldwide income.
If you are a temporary UK resident, you only have to pay this tax on your income from abroad, and not from inside the UK.

The rates of Personal Tax are based on the level of income you earn annually.
Earnings between £1 and £35,000 are taxed at 20%.

Earnings above £35,000 are taxed at 40%.

And earnings above £150,000 are taxed at 50%.

The basic personal tax-free allowance in the UK is £8,105. This is reduced by £1 for every £2 above the limit of £100,000.

Next is VAT:
During your company formation you should register for VAT with HMRC. All companies that supply taxable goods and services and/or have an annual turnover of £77,000 must pay VAT.

The current rate is now 20%, but reductions and exemptions apply to certain products and services.

Lastly is PAYE:
This stands for Pay As You Earn and is the system used by employers to collect the Income Tax from employee’s wages. This is the employer’s responsibility within the payroll, and before employees receive their wages, tax and National Insurance contributions should be deducted and sent to HMRC.

Before you begin conducting business in the UK it is advised to find out which tax applies to you and whether or not you qualify for any reductions or exemptions. Avoiding your tax payments will incur penalties and fines, but you can easily avoid these simply by being organised.

About the Author: Open A European Company provide specialist service packages to comprehensively support your business in setting up a new company abroad. From bank account set up, to tax planning, and accountancy and payroll, they will manage your business requirements.