To find out more, you can either watch our video or read about it below.
The taxes you pay to HMRC come in two forms
The first is DIRECT TAXES – these are charged on income, profits or other gains. They are either deducted at source, for example payroll taxes, or paid directly to HMRC. The main direct tax for Limited Companies is Corporation Tax and for Individuals, Sole Traders and Partnerships it is Income Tax.
The other form of tax is INDIRECT tax which is charged on spending. The indirect tax which we will look at is VAT. In this case it is the responsibility of the seller to pass the tax onto HMRC.
What is Corporation Tax?
This is a tax charged on UK resident companies based on their profits. The Corporation Tax rate is set annually by the Government and for the 2018/19 tax year is 19%.
You must register your company for Corporation Tax with HMRC within 3 months of setting up the business.
Each year a company is required to complete a Corporation tax return called a CT600 and file it online with HMRC. Normally this must be done within 12 months of the Company’s year end date. An important point to note is that BEFORE this 12 month filing deadline is reached, any Corporation tax due must be paid electronically to HMRC. This payment deadline is 9 months and 1 day after the end of the accounting period.
It is the responsibility of the DIRECTORS to ensure these deadlines are met and HMRC will issue penalties for late filing of the return or payment of any tax due.
What is in included in my Corporation Tax calculation?
A Company pays Corporation Tax on
- Profits from its trading activities
- Income from its investments
- Any chargeable gains from selling assets for more than they cost.
If the company is based in the UK it pays Corporation Tax on all its profits from both the UK and abroad.
What happens if I make a loss?
Any trading losses made by a company can be carried forward and offset against any future trading profits which reduces the future tax liability. Alternatively they can be set against the company’s TOTAL profits for a specified period. Even if the company has made a loss and has no payment to make a CT600 return must still be filed.
What is Income Tax?
This is the tax charged on the income of Individuals, Sole Traders and Partnerships. Income tax is assessed for each self assessment tax year which begins on 6 April in the year and ends on 5 April in the following year.
Most people pay income tax through PAYE which is deducted from their wages before they receive their pay. If you have other sources of taxable income you must complete a Self Assessment Tax Return. This can be done using a paper form or online. Once the tax year has ended on 5 April paper returns must be submitted by the 31 October. If you file your return online the filing deadline is extended to the 31 January. Any tax due must be paid by 31 January.
What is included in my Income Tax calculation?
The types of income which are taxed include
- Money and benefits from employment
- Profits you make from being self employed
- Some state benefits
- Most pensions
- Rental income
- Investment income above tax free thresholds.
There are several allowances which can reduce you tax bill. The most common ones are
- a personal allowance of tax free income, and
- allowances for savings and dividend income.
The rates of income tax vary, for the 2018/19 tax year
- income above the £11,850 personal allowance up to £46,350 is taxed at 20%,
- income above this up to £150,000 is taxed at 40% and
- any income above £150,000 is taxed at 45%.
What happens if I have paid too much tax?
If you find yourself in a situation where you have paid too much tax you can request a rebate from HMRC.
What is PAYE?
PAYE stands for Pay As You Earn. It is the system for collecting income tax from your earnings or pensions during the tax year. As with all forms of income tax the tax year begins on 6 April in the year and ends on 5 April in the following year.
How often tax is taken off depends on how often you are paid – usually weekly or monthly for employees.
How is it calculated?
HMRC will calculate a tax code for you and send it to your employer. Most PAYE codes are made up of a number followed by a letter:
- the letter relates to the type of allowance you are getting
- the number shows the amount of the allowances which may be set against tax.
Your employer then uses that tax code to work out how much tax to take off your weekly or monthly pay or pension using the income tax rates and banding for the current tax year. They pay over that tax (and National Insurance contributions, if appropriate) to HMRC on a monthly basis.
What information will I be given?
You will be given a payslip each time you are paid. It may show the tax code your employer used to work out the tax to deduct from your gross pay.
If you are employed at 5 April, the end of the tax year, your employer will give you a P60 ‘end of year certificate’ by 31 May. This will show your pay, the tax deducted and usually the final tax code operated. It is always worth checking you tax code to make sure it is correct.
If you leave a job during the tax year your employer will issue you with a P45 which shows your pay and the tax deducted for the tax year to date. You give this to your new employer when you start another job.
What is National Insurance?
National insurance contributions are payments based on your level of earnings. They help to fund the UK social security system. You pay National Insurance contributions to qualify for certain benefits and the State Pension.
Who pays National Insurance?
To pay National Insurance you need a National Insurance number. You have a National Insurance number to make sure your National Insurance contributions and tax are recorded against your name only. It’s made up of letters and numbers and never changes.
If you don’t have a National Insurance number you can request one.
You pay National Insurance if you’re 16 or over and either:
- an employee earning above £162 a week
- self-employed and making a profit of £6,205 or more a year
How much National Insurance will I pay?
There are different types of National Insurance (known as ‘classes’). The type you pay depends on your employment status, how much you earn, and whether you have any gaps in your National Insurance
Employees pay Class 1 National Insurance contributions of 12% on wages between £702 to £3,863/month, and 2% on wages above this. Contributions are collected by payroll deductions. As well as their own contribution employers also make a National Insurance contribution on behalf of their employees. Both these contributions are paid over to HMRC monthly.
If you’re self-employed you pay Class 2 National Insurance of £2.95/week if you have profits of £6,205 or more a year. If you make profits of £8,424 or more a year you pay Class 4 National Insurance of 9% on profits between £8,424 and £46,350 and then 2% on profits over £46,350. Most self-employed people pay their National Insurance through their Self Assessment Tax Return.
If you have gaps in your national insurance records you can voluntarily pay Class 3 contributions to make up the shortfall. The main reason for doing this would be to ensure you have 30 qualifying years of contributions so that you receive the full state pension on retirement.
What is VAT?
VAT is an indirect tax on spending and is charged on certain categories of goods and services sold in the UK. Certain types of good and services are exempt from VAT – the most common ones are
- Insurance and finance
- Education and training and
- Charity fundraising.
How much VAT do I pay?
For goods and services that are taxable there are 3 rates of VAT charged;
- Standard rate charged at 20% is the most common and covers supplies not specifically included in one of the other categories
- Reduced rate charged at 5% on for example children’s car seats and home energy costs
- Zero rated which as the name suggests is charged at 0% applies to for example non luxury food, children’s clothes, books and publications.
Do I have to pay the VAT to HMRC?
If you are an individual the answer is no, although you are paying VAT when you buy goods and services you are not directly responsible for paying it to HMRC.
If you operate a business with Vatable turnover greater than £85,000 in a 12 month period, the business is required to register for VAT. The business must then charge VAT on items it sells at the appropriate VAT rate for the category of goods or services. This VAT is collected when payment is received from customers and accounted for to HMRC on a quarterly basis. The business must pay HMRC the net of the VAT on its sales after deducting the amount of any VAT it has paid on business purchases. Any VAT due must be paid to HMRC within one month and 7 days of the end of the VAT quarter. If the business has paid out more VAT on purchases than it has received on its sales it can request a rebate payment from HMRC.
If you have any queries on any of the taxes, please get in touch with us. We’d love to help.