A Guide to Taxation in the United Kingdom
When concerning themselves with the world of markets, investors are prone to forget an aspect of trading that can impact their earnings very greatly. That aspect, rather than any kind of analytical strategy or inside information, is pure and simple taxation. Knowing the tax policies of one’s home country is invaluable, which is why this article will act as a brief introduction to taxation in the United Kingdom. In it, we will explore the various types of tax that can be applied to British citizens and businesses, as well as how they vary with earning levels.
Beginners Guide to Tax:
The most basic form of taxation, income tax is the principal supplier of funding for the government of the United Kingdom. For income tax, a standard personal allowance of £10,600 is given to every British taxpayer. Workers who earn this amount or less are exempt from paying taxes on their income. For those who do have to pay taxes, there are three basic tax brackets. The basic bracket encompasses earnings of £0-31,85 at 20% taxation, the higher rate includes earnings ranging from £31,786-150,000 at a 40% tax rate, and the additional rate bracket taxes all income over £150,000 at a rate of 45%. These rates apply to employment income, pensions, and rental income.It should be noted that these are the base rates. Special rules apply to certain types of income. For example, capital gains are taxed at 18% for basic and 28% for higher and additional rate taxpayers. A trader or investor can make up to £11,100 in a single year before the gains become taxable. Income from share dividends is treated somewhat differently, being taxed at 10% for basic rate payers, 32.5% for higher rate payers, and 42.5% for additional rate payers. A special set of tax rules also applies to savings interest. Basic rate payers are taxed 20% on their interest, while higher and additional rate earners are taxed an extra 20 and 25%, respectively.
Inheritance taxation in the UK works somewhat differently than income taxation. Any estate with a total value of £325,000 or more will be subject to a 40% inheritance tax. This rate can, however, be dropped to 36% by donating 10% or more of the value of the estate to charity before the beneficiary or beneficiaries take possession.
Value Added Tax
The Value Added Tax, or VAT, is a tax on the purchasing of goods and services similar to an American sales tax. In the UK, a standard VAT rate of 20% applies to most nonessential products. This rate was raised from 17.5% in 2011. Some products and services, however, and given special rates due to their status as essentials. For example, home energy bills are taxed with the reduced 5% rate, while food and most children’s clothing are categorized as zero rate items, on which no VAT is charged.
At present, the UK charges a tax of 20% on companies that make £300,000 or less, with a 21% rate on those that earn more. This system, however, is set to be replaced in April of next year with a 20% tax on all company earnings. Following a system of progressive tax easing, that rate will be lowered to 19% on earnings in 2017, 2018, and 2019. An 18% corporate tax rate will then be employed in 2020, with no definitive point of expiration.
The wide ranges of different taxes that are applied to those living in the United Kingdom make a good understanding of British tax policy a must for traders and investors who plan to make a living or even additional income from capital gains. Markets and property investments are both affected by high tax rates, and so it is important to factor these rates in when calculating the profitability of an investment. It is also important to know and understand what deductions can be gotten to somewhat ease the burden of taxation in the UK. A certified accountant or tax attorney who is well versed in the laws governing UK tax policy is an invaluable asset for traders, property investors, and entrepreneurs who wish to make their businesses as profitable as possible.