Two broad categories of UK taxation system are the central government tax and the local government tax.
The central government tax falls under the purview of HMRC. HMRC stands for Her Majesty’s Revenue and Customs.
The revenues for the central government are mainly from income taxes, VAT, Corporate tax, Insurance contributions etc. The local government revenues are from Grants, council tax etc.
UK Accounting Tax
Persons and companies residing or domiciled in UK are subject to taxes. Persons who are domiciled in UK are subject to payment of taxes of income derived in other places as well. Income taxes are the biggest revenue collector for the government. Tax accounting will require an understanding of different types of taxes and indicative rates.
There is a concept of minimum tax allowance in UK. A minimum amount of annual income is tax free for everyone. This is about 9000 pounds currently. However, this may change every year. This is also different for different segments of people.
For instance, people born after 05-Apr-1948 have an allowance of 9440 pounds, while people born before 06-Apr-1938 have an allowance of 10,660 pounds. Special categories have additional allowances. An understanding of income tax allowances is very important in UK income tax accounting.
Progressive taxation
Like other countries, UK follows progressive taxation. This means that rates are higher for higher income. The lower rate is applicable up to a certain amount above the minimum tax allowance. There are other rates commonly called as basic, higher and additional rates.
The lower rate is 10% currently for up to 2,790 pounds above the minimum allowance. The basic rate is 20% for up to 32,010 pounds above the minimum allowance.
The lower rate on dividend income is 10% while the higher and additional rates are 32.5% and 37.5% respectively. UK income tax rates vary each financial year.
Inheritance taxation
Inheritance taxes are also common in most countries. In UK, there are no taxes for inheritances of up to 325,000 pounds. Inheritance tax of 20% is applicable for a single transfer.
A transfer within 7 years of death will carry a 40% tax. If more than 10% is left to charity, a rate of 36% is usually applicable.
Inheritance taxes don’t usually, fall under purview of income tax accounting since they don’t occur every year.
National insurance contributions
National insurance amount contributions are a major source of revenue for the government. These are not generally known as taxes.
Gaining an understanding of other types of taxes may help in understanding how to calculate total taxes. This is very important from an accounting perspective.
The Corporate tax is 20% for profits up to 300,000 pounds and is about 23.5% for above 1.5 million pounds of net profit.
Capital Gains taxes are taxes on any profit from selling any investments such as stocks, bonds, property etc. For individuals, capital gain taxes vary between 18-28%. For a trust, the capital gain tax rate is 10%.
However for individuals there is a relief of up to 10,900 pounds of gains. Capital gain taxes may be important to arrive at total income tax payable.
For more understanding of UK taxation and tax laws, it is recommended to consult a tax consultant or an accounting firm.
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