Taxes in United Kingdom, Taxation in United Kingdom, Taxes system in United Kingdom
UK personal Tax Rates
The marginal tax rate for individuals in the U.K. is 50%.
Employment, trading and investment income (other than dividends) are normally taxable at marginal rates of up to 40%. From 2010/11, there is an additional higher rate of 50% for taxable income above GBP 150,000 which makes the top marginal tax rate 50% in UK.
Year to 5 April 2011 Tax Rate
L0 – 37,400 20%
L37,400 – 150,000 40%
There is a 10% starting rate for savings income only, with a limit of L2,440 in 2009/2010 and 2010/2011. This does not apply if taxable non-savings income is above this limit.
Tax rates applicable to dividends in 2009/2010 are 10% for persons paying tax only in the basic rate band and 32.5% for higher rate taxpayers. A tax credit is available which reduces the effective tax rate to 0% in the basic rate band and 25% in the higher rate band. From 6 April 2010, those earning total annual income in excess of L150,000 are subject to tax on dividends at a rate of 42.5% (or 36.11% after the tax credit is taken into account).
Taxable persons comprise resident or ordinarily resident individuals, trustees and executors as well as non-resident individuals, trustees and executors on their UKsource income. Resident or ordinarily resident and UK domiciled persons are subject to income tax on their worldwide income as it arises. Non-residents are normally only subject to income tax on income arising in the UK.
Broadly, UK resident or ordinarily resident individuals are liable to capital gains tax whilst non-residents are not.
Residence has historically been determined by physical presence in the UK for at least 183 days in any one tax year (6 April – 5 April), or if visits (or intended visits) for four consecutive years average 91 days or more. However, recent tax cases have shown a change in HMRC policy in using the number of days as the determining factor. Instead, a more 'qualitative' approach is being used which looks at other factors such as availability of UK accommodation, location of family and the maintenance of social or business interests in the UK.
A person is normally regarded as ordinarily resident if he has been in the UK for three years or it is clear from the date of arrival that his intention is to stay for three years or more. A person will also be treated as ordinarily resident if he becomes resident and has a UK property available for his use.
Broadly, an individual is domiciled in the country or state which he regards as his permanent home. He acquires a domicile of origin at birth, normally that of his father, and retains it until he acquires a new domicile of choice. To acquire a domicile of choice, a person must sever his ties with his domicile of origin and settle in another country with the clear intention of making his permanent home there.
An individual who is resident but not ordinarily resident in the UK, or any individual who is resident (whether ordinarily resident or not) but not domiciled in the UK, can make a claim to have his foreign income taxable on the remittance basis. A charge of L30,000 per annum applies to certain individuals making a claim to apply the remittance basis.
An employee who is resident but not ordinarily resident in the UK is only subject to UK tax on the part of his emoluments related to duties performed abroad in so far as they are remitted to the UK. However, individuals who are resident or ordinarily resident are taxed on all remuneration paid under a single contract of employment even if some of the duties of that employment are carried out overseas. It may be possible for foreign domiciled employees to continue to get relief if there are separate contracts of employment covering UK and overseas duties. The contract for the foreign duties should be with an overseas employer.
Husbands and wives are taxed separately and each is entitled to a personal allowance (L6,475 for the years to 5 April 2009 and 5 April 2010). The income of a minor unmarried child is also taxed separately, unless it originates from funds given to the child by the parent and it is in excess of L100.
Donations to UK registered charities are made net of basic rate tax. For each L80 donated by an individual, the charity receives a total of L100. Higher rate tax relief is given by extending the basic rate band by the grossed up amount of the gift (see below).
A UK resident individual under the age of 75 may join a personal pension scheme and make contributions. Tax relief for all contributions in a tax year is given on the higher of 100% of relevant UK earnings and L3,600 (gross), and is further restricted to the annual allowance (L245,000 for 2009/2010 and L255,000 for 2010/2011). The total amount an individual may contribute into a pension over his lifetime is determined by the lifetime allowance (L1,750,000 for 2009/2010 and L1,800,000 for 2010/2011). Restrictions will be applied to the tax relief available to high income individuals from 6 April 2011 onwards.
High income individuals are defined as those with annual income in excess of L150,000 including employer pension contributions and in excess of L130,000 without taking those contributions into account. Anti-forestalling rules apply in 2009/2010 and 2010/2011 to prevent pensions being 'topped-up' in advance of these new rules.
Interest on loans taken out for wholly and exclusively business purposes qualify for tax relief and these include interest on loans taken out to:
(a) acquire shares in a close company
(b) acquire shares in an employee-controlled company
(c) acquire interest in a partnership or to acquire machinery or plant for use in a partnership or employment.
Individuals are entitled to a tax credit of up to 20% of the value invested in qualifying shares in the enterprise investment scheme (EIS) up to L500,000 per annum; and 30% of the amount subscribed on venture capital trusts (VCT) companies up to L200,000 per year. In addition, dividends received from ordinary VCT shares are exempt from income tax. EIS shares also qualify for capital gains deferral relief and there is no upper limit.
From 6 April 2010 up to L10,200 annually may be invested in individual savings accounts (ISA) of which no more than L5,100 may be invested as cash deposit (the rest must be invested in shares). Any income or gains from investments in an ISA is tax-free.
Capital gains chargeable on taxpayers other than companies are subject to capital gains tax at a rate of 18%. There is an annual exemption from tax on capital gains available per individual which for the year ended 5 April 2010 is set at L10,100. Capital gains derived from assets outside the UK will not be subject to UK tax in the hands of a foreign domiciled individual unless remitted to the UK provided the remittance basis has been claimed for that tax year. Individuals who leave the UK and become not resident and not ordinarily resident for a period of less than five complete tax years may still be liable to tax on their return on any capital gains realised on assets owned prior to departure from the UK. This rule applies to those individuals who were resident and ordinarily resident for at least four out of seven tax years immediately proceeding the year of departure.
UK INHERITANCE TAX (IHT)
A UK domiciled or deemed domiciled individual is potentially subject to IHT on the transfer of any property owned by him whilst a non-UK domiciled individual may only be subject to IHT on the transfer of property situated in the UK. IHT is a combination of gift and death tax. The first L325,000 in 2009/2010 and 2010/2011 is free of IHT (the 'nil rate band'). It normally only arises on death but, in certain circumstances, lifetime gifts can also be chargeable to IHT. The rate on lifetime chargeable transfers is 20% and property passing on death is charged at 40%. On death, IHT may also be levied on gifts made within the previous seven years at the death rate. Special rules apply to IHT on trusts.
A foreign domiciled individual automatically acquires a 'deemed' domiciled in the UK for IHT purposes if he has been resident in the UK for 17 out of the previous 20 tax years, unless he is excluded from this rule under the terms of a double taxation treaty.
There are also some lifetime exemptions such as an annual exemption of L3,000; L2,500 or remoter issue L1,000. Transfers between spouses are exempt from IHT except when the transfer is made to a foreign domicile spouse by a UK-domiciled spouse, when the exemption is limited to L55,000.
UK Company Tax rates
The main rate of corporation tax in UK is 28% (except for ring fence profits from oil rights and extraction). A reduced rate of 21% applies to small companies (i.e. companies with taxable profits of less than GBP 300,000).
A UK resident company is liable to corporation tax on all its sources of income and capital gains, wherever arising. A company is deemed resident in the UK if it is incorporated in the UK or has its central management and control located in the UK.
A non-resident company carrying on a trade in the UK through a permanent establishment located in the UK is liable to corporation tax on all income and gains attributable to that establishment.
Corporation tax rates are fixed for each financial year ended 31 March. If the company's accounting period does not coincide with the financial year, its profits must be time-apportioned and the corporation tax rate is applied accordingly.
Profit 1 April 2010 – 31 March 2011
L0 – 300,000 21%
Over L1,500,000 28%
Marginal relief applies to companies with profits between L300,000 and L1,500,000.
The above thresholds may be reduced where the UK company has associated companies worldwide or an accounting period of less than 12 months.
Large companies (broadly, those with profits taxed at 28%) are required to pay their tax in instalments (generally in four equal instalments). The first payment is due six months and 14 days from the first day of the accounting period. There is a de minimis limit which enables companies with an annual corporation tax liability of L10,000 or less to avoid making such payments.
For companies not required to pay their tax in instalments, corporation tax is due for payment nine months and one day after the end of the company's accounting period.
UK CAPITAL GAINS TAX
Capital gains are taxed at the appropriate corporation tax rate. Non-resident companies are only taxed on capital gains from the sale of assets used in, or for the purposes of, a trade which is carried on through a permanent establishment located in the UK. There are special provisions allowing tax deferrals by UK resident and nonresident companies. Capital losses can only be offset against capital gains or carried forward indefinitely but cannot be carried back.
In addition, disposals of qualifying shareholdings after 1 April 2002 are exempt. A capital gain or loss accruing on the disposal of shares in a trading company may be exempt where at least 10% of the share capital has been held for a minimum of 12 months.
BRANCH PROFITS TAX
There is no branch profits tax in the UK. Foreign branch profits of a UK company will be liable to UK company tax. A UK branch of a non-resident company is taxable on its profits and gains in the same way as a UK resident company.
FRINGE BENEFITS TAX (FBT)
No FBT is payable by the employer as the employees are normally taxed on benefits provided by virtue of their employment. However, National Insurance may be payable by the employer on the cash equivalent of the benefit provided.
Local authority rates are charged on the occupier of commercial property in the UK based on the rateable value of real estate at a level determined by central government.
Stamp duty, at a rate of 0.5%, is payable by the purchaser (whether or not UK resident) on the transfer of shares in a UK incorporated company. Stamp duty on property transactions was largely replaced on 1 December 2003 by stamp duty land tax (SDLT) which is payable on UK land and buildings transactions and the rates are between 1% and 4%. Special provisions apply to leases.
For the year to 5 April 2010, social security contributions are broadly charged on employees at a rate of 11% on earnings over L476 per month up to earnings of L3,656 per month and 1% thereafter. There is no upper limit to the employer's contribution which is broadly charged at 12.8% of an employee's earnings over L476 per month. It was announced in the Pre-Budget Report 2009 that all national insurance contribution rates will increase by 1% from 6 April 2011 so that the rates referred to above become 12%, 2% and 13.8% respectively.
Taxable trading profits are calculated by ascertaining assessable income and subtracting allowable deductions. Generally, to be deductible, expenditure must be wholly and exclusively incurred for the purposes of the trade.
Stock and work in progress are valued at the lower of cost and net realisable value, the only bases acceptable for tax purposes.
UK CAPITAL GAINS AND LOSSES
As discussed above, capital gains are included within the profits chargeable to corporation tax for an accounting period. Gains are normally computed by deducting the cost of an asset from its sale proceeds. An indexation allowance for inflation is available to companies. Capital losses can only be set against current or future capital gains and not against income.
Dividends received from both UK and overseas companies are generally exempt from corporation tax with effect from 1 July 2009. For further details see section C below.
Interest is generally deductible on an accruals basis. The main exception is where, under certain circumstances, the interest is payable to a connected party and remains unpaid for more than 12 months after the end of the accounting period.
Relief for such interest is deferred until it is paid unless the lender is liable to UK corporation tax and has brought the interest receivable into account.
A new 'worldwide debt cap' regime applies for accounting periods beginning on or after 1 January 2010. The regime only applies to large groups. These are groups:
- with at least 250 employees or
- turnover of mora than Euro 50m and gross assets of more than Euro 43m (irrespective of the number of employees).
The regime is very complicated but, broadly speaking, it seeks to restrict the tax deductions for financing expenses in the UK companies of a worldwide group to the worldwide external finance expense of the group as a whole.
Interest paid to a parent or fellow subsidiary (under common control) is not deductible to the extent that the payment would not have been made if the companies had not been connected. There are no statutory debt / equity restrictions although the UK tax authorities may consider debt to equity ratios exceeding the range of 1:1 and interest cover of less than 3:1 as not arm's length. From 1 April 2004, the UK thin-capitalisation provisions were incorporated into the transfer pricing rules which, in turn, were extended to encompass UK to UK transactions.
FOREIGN SOURCED INCOME
The UK has controlled foreign company (CFC) legislation which is designed to tax holding companies on the profits of subsidiary companies in a 'low tax territory' (countries where the tax rate is less than three-quarters of the corresponding UK tax on those profits). UK resident companies that hold a 25% or greater interest in a CFC may be taxed on the profits of the CFC but there are a number of exceptions to this rule.
UK TAX INCENTIVES
There are a number of grants and other forms of assistance available to businesses in the UK. Certain qualifying research and development revenue expenditure qualifies for 175% tax relief if incurred by small and medium sized companies. 130% relief may also be available for large companies. In designated 'enterprise zones' (ie development areas) an initial allowance of 100% is available for commercial buildings although these are being phased out.
FOREIGN TAX RELIEF
Foreign tax paid on income and gains of a UK resident company may be credited against the corporation tax on the same profits. The foreign tax relief cannot exceed the UK corporation tax charged on the same profits.
Domestic and foreign dividends received by UK resident companies from 1 July 2009 are generally tax exempt. Various conditions need to be met and those conditions are different depending on whether the recipient is a small company.
Tax losses (other than capital losses) may be surrendered within a 75% UK group effectively allowing consolidation of losses against profits and capital gains. Where a UK group company takes over the trade of a 75% fellow UK group member, the unused trading losses and capital allowances are transferred to the acquiring company. The trade losses are offset against future profits of the trade transferred.
Companies may also benefit from consortium relief. A company is owned by a consortium if at least 75% of the ordinary share capital is held by companies, each of whom owns at least 5%.
The transfer of assets within a 75% group of UK companies does not give rise to a capital gain. If the transferee company leaves the group within six years of such a tax-free transfer, it will become liable to capital gains tax based on the market value of the asset at the time of the transfer.
A company with capital losses may elect to treat a gain which would have been realised by another UK group company as if it had been realised by it. The practical effect is to give a form of 'group relief' for capital losses.
RELATED PARTY TRANSACTIONS
UK companies and partnerships are required under self assessment to document all relationships with overseas associated parties and to identify and include in the tax calculation prices which are in line with what would be expected if the relevant transactions had taken place on an arm's length basis. From 1 April 2004, these rules were extended to cover UK to UK transactions. However, in certain circumstances, small and medium-sized groups may be exempted from the UK's transfer pricing provisions.
UK WITHHOLDING TAX
Subject to the terms of the tax treaty, withholding taxes must usually be deducted from interest and royalties. No withholding tax applies to dividends paid by UK resident companies.
There are no exchange controls in the UK.
UK vat - United Kingdom Value Added Tax Rates
The standard VAT rate in UK reverted to 17.5% on 1 January 2010, with a reduced rate of 5% for certain items (the rate was reduced to 15% for the period 1 December 2008 to 31 December 2009). There also are some specific zero-rated reliefs and exemptions.
VAT is charged on the supply of most goods and services made by businesses in the UK. VAT is collected at each stage of the supply chain, generally when title to the goods passes or when services are performed. The burden of the tax falls on the ultimate consumer.
Supplies of goods or services made in the UK by foreign entities can give rise to a requirement to register for VAT in the UK. From 1 May 2009, VAT registration is compulsory for businesses making UK taxable supplies exceeding L68,000 p.a. although voluntary registration is sometimes available for businesses trading below this level.
From 1 January 2010, the standard rate of VAT in the UK is 17.5%. Some supplies, such as the grant of certain interests in land, insurance, education, financial services, and health and welfare, are exempt from VAT (i.e. no VAT is charged but recovery of VAT on related purchases may be restricted). There is the 'option' for businesses to charge VAT on non-residential property transactions in order to recover VAT incurred, subject to anti-avoidance restrictions.
The export of goods from the UK, plus UK supplies of some other goods and services (eg books, food, children's clothing) are zero-rated. Others are subject to VAT at the reduced rate of 5% (eg certain building works and energy saving products).
VAT-registered businesses with an annual taxable turnover not exceeding L150,000 may elect to simplify their VAT accounting by using the 'flat rate' scheme. Businesses account for VAT at a flat rate on turnover rather than on every single transaction but will not be able to recover VAT on expenditure other than capital items over L2,000.