Taxes in England for individuals and legal entities. UK tax system

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The main taxes in England are income tax, property tax, capital gains tax, inheritance tax and VAT. Many of these taxes are stratified: people with higher incomes pay higher rates.

The UK tax system applies throughout the United Kingdom: in England, Scotland (with some differences), Wales, Northern Ireland and the islands, including oil drilling platforms of international companies in territorial waters. The Channel Islands, the Isle of Man and the Republic of Ireland have different tax laws than the United Kingdom.

Tax year

The dates of the tax reporting period are set from April 6 of one calendar year to April 5 of the next year. The current tax year is indicated in documents as 2019/20.

Tax resident status: who should pay taxes and how

Regardless of residence, the income of all individualsare taxed on a single tax progressive scale. The status of tax residence determines which income should be included in the tax base of a particular tax.

All income of an individual - tax resident - will be taxed in the UK, regardless of the country - the source of income, taking into account the benefits provided by the Conventions for the Prevention of Double Taxation. Such conventions have been signed by England with most countries.

Non-residents pay taxes to the treasury of England on income received only from sources in the kingdom.

Determination of tax residency

An individual is recognized as a UK resident for tax purposes when one of the following conditions is met:

• residents in the country for at least 183 days during the tax year;
• has a residential property in the UK and has lived in it for at least 91 consecutive days, 30 of which must be in the reporting tax year;
• works in the UK for 356 days without significant interruption, and at least 274 days must be in the tax year in question.

These are universal rules for determining tax residency, but there are also exceptions to them. It is important to remember that the UK tax year is not the same as the calendar year.

Domicile

In international legal practice, it is used to determine the national law or jurisdiction, according to the laws of which a particular case should be considered by the court. Domicile characterizesthe status of legal relations and permanent residence in a particular jurisdiction and to some extent is an analogue of citizenship. Residence status takes precedence in the tax laws of most countries.

The use of domicile status in UK tax law is probably a legacy of the colonial past of the British Empire and is an anachronism in modern times. But a citizen can be tax resident if they have at least four sufficient demonstrable links to the UK and stay in the UK for 16 days in a tax year. This is not always good for the taxpayer.

Taxable income of residents and non-residents

Tax non-residents are taxed on UK sourced income. UK residents are taxed on all income, regardless of source, including foreign investment and savings interest, rental income from overseas property and income from foreign pensions, in accordance with the rules and rates of British tax law.

Income tax

In the country, many of the taxes that an individual is responsible for paying are tied to income tax rates. The basic formula for calculating tax is to add up all personal income and taxpayer benefits, subtract the personal allowance (the non-taxable minimum income exempted from taxation) and then pay the tax calculated at the appropriate rate on this amount.

In 2018/19personal allowance was £11,850 in the tax year, rising to £12,500 in 2019/20.

In the UK there is a progressive income tax scale, the rates are stepped depending on income. These same income ranges are used to determine other tax rates, such as capital gains.

Tax on rental income

Tax on property rental income is paid by all landlords, regardless of residency status. Special rules apply for single-occupancy and holiday rental properties. Different tax rules apply to foreign landlords.

Net receipts are defined as gross rental receipts less allowable expenses. The UK prohibits most of the capital costs of real estate from being deductible, including purchase or renovation costs, depreciation and some mortgage interest.

Property taxes

UK has the second highest property tax after the US.

There are two forms of property tax in the state. When buying property in the UK, you are required to pay the Stamp Duty Land Tax (SDLT). The SDLT only applies to residential properties over £125,000. And non-residential properties with an acquisition price of more than £150,000.

Stamp duty is levied in England and Northern Ireland. Scotland and Wales levy their own taxes on land and property transactions. In each of the autonomies, rates onthe purchase of investment properties and the purchase of a house in the presence of residential real estate are higher.

Like the income tax, the SDLT is progressive. The tax is payable within 30 days after the completion of the sale-purchase transaction. The obligation to declare, calculate and pay tax is usually assigned to the lawyer who draws up the transaction, with the subsequent presentation of the invoice to the customer.

There are tax incentives that allow you to reduce property tax in the UK, for example, when buying several properties at the same time.

Another form of UK property tax is the council tax. The tax reporting period for this tax is a year. Local council tax not related to sales transactions is also stratified.

Municipalities annually evaluate the property under their jurisdiction and set the amount of tax at the assessed value.

Capital gains tax

Capital gains tax (CGT) is charged on the difference between the sale price and the purchase price of assets. CGT is charged on profitable sales of a range of assets.

Taxable assets include:

• personal property valued at £6,000 or more (excluding vehicles);
• residential property;
• shares that are not in ISA or PEP;
• business assets.

CGT must be paid on all UK assets regardless of tax residency status.

Profit from the sale of assets is added to other taxable income of an individual in the reporting tax year. The UK capital gains tax rate depends on the amount of annual income:

• If your total taxable income is less than £46,350, the capital gains tax rate is 18% on property and 10% on other assets.
• If the amount of capital gain plus other income exceeds £43,350, the rate will be 20% of the proceeds from the sale of other assets and 28% of the amount in excess of £46,350.

In the country, any tax under a progressive taxation scale is calculated according to the same scheme: a higher rate is paid on income that exceeds the maximum threshold for applying the previous rate.

Inheritance tax

Inheritance tax is a one-time payment that is levied on the receipt of an inheritance in excess of the tax-exempt value, which currently stands at £325,000. The tax is calculated at a rate of 40% on the amount exceeding the threshold maximum. A tax relief of 4% is available if the taxpayer donates more than 10% of the inherited property to charity.

Transport tax

In England, as in all countries, the amount of transport tax depends on the size of the engine, the type of fuel used, the emissions of toxic substances into the environment and the date of manufacture of the car.

Tax ratesfor alternative fuel vehicles 10 pounds lower than for petrol and diesel vehicles.

Corporate and sole proprietorship tax

Sole proprietors must register with HMRC. Most corporations in the UK are taxed at a rate of 20% on their net income and are required to file a company tax return. Allowable expenses include normal operating expenses and, if the companies are operated from a separate office in the private home of the owner or chief executive, may include a proportionate share of household expenses.

Individuals are en titled to a prorated amount of vehicle expenses if they use their personal vehicle for business purposes.

One of the benefits of operating certain business structures, such as a limited liability company, is the ability to receive money from the company in the form of dividends. The dividend tax rate is lower than income tax rates.

The applicable UK corporate tax rate depends on the level of profits of the company, and the legal form of doing business:

• as a limited company;
• as a foreign company with a UK branch or permanent establishment;
• as a club, cooperative or other unincorporated partnership (such as a public or charitable foundation).

Dividend tax

Holders of shares in British companies pay tax on dividends. There is a tax exempt minimum of £2,000 per tax year.

UK dividend tax rates are as follows:

• 7, 5% base rate;
• 32, 5% higher rate;
• 38, 1% extra rate.

VAT

VAT, or sales tax, is sometimes referred to as business tax in the UK. It applies to almost all goods and services, so the answer to the question of who is the VAT payer is obvious. May also apply to goods and services from abroad if the company exceeds certain limits. In fact, this is an analogue of VAT on services of non-residents, familiar under Russian law.

The standard VAT tax period is a quarter. But there are a number of simplified methods for calculating this tax with the budget. The firm can choose the advance payment method. Their size is determined by the activity for the previous year. Advances are paid to the budget monthly or quarterly. The tax period for VAT in this case will be a year.

A feature of tax legislation is a large number of tax accounting methods for tax purposes. This is very convenient for the taxpayer. It is possible to optimize accounting in two ways: both minimizing payment costs and accounting costs. Many companies that are VAT payers are taking advantage of this opportunity.

The standard VAT rate is 20%. Certain goods and services are taxed at lower rates.

Current Value Added Tax Rates in Country:

• 20% - the standard applies to most goods and services;
• 5% reduced rate for medical equipment, small cars, hygiene and sanitation items, etc.
• 0% - zero rate. Applies to low-rated products: baby food, clothes, books, periodicals, etc.

As in Russian jurisdiction, a number of goods and services are exempt from VAT. It is not clear how many companies are not VAT payers, except for banks, insurance companies, medical and educational centers, and there are others. Sale of commercial real estate and land plots are not taxable.

If it is economically feasible in the context of the business, the company has the right to refuse the exemption and switch to using standard VAT rates. How many companies exercise this right is unknown.

Declaration of taxes by individuals

Taxes for an individual employed in the UK are withheld, paid and declared by the employer, as are National Insurance Contributions. Tax residents who receive income from other countries are required to declare it themselves.

For online declaration, the deadline for submitting the declaration is January 31 of the year following the reporting period. The declaration on paper is submitted to the tax service no later than October 31. Preliminary information on foreign income must be brought to the attention of the fiscal authorities at the end of the tax year, that is, no later than 5April.

Tax refund

Under certain conditions, the taxpayer is en titled to a rebate (refund) of tax in England for reasons provided for in tax law.

Application for a refund is submitted to the fiscal authorities online no earlier than October. The terms for consideration of such applications and the return of money do not exceed one and a half months.

Tax evasion

As in any jurisdiction, punishable by a fine that can reach 100% of the amount of hidden tax. Sanctions for late filing of tax reports are not tied to the amount of taxes, the fine is fixed - 100 pounds sterling.