Income tax

Income tax refers to tax imposed by the government on money generated within their jurisdiction. According to law, individuals and businesses must complete an income tax return each year in order to determine whether taxes are owed, or taxes need to be refunded.

Through income tax, the UK government gets its single largest source of revenue, which is about 30 percent of the total. It provides a key source of funds which the government employs to fund its activities and serve the people.

Income tax is made up of tax from the following sources of income:

  • Rental income
  • Employment earnings and benefits
  • Earnings from self-employment
  • Income from a trust
  • Income from most pensions, including personal, state and occupation
  • Interest on some savings
  • Certain social security benefit

Not all income can be taxed, and individuals are entitled to a stipulated amount of tax free income in tax year. In addition, income tax payments are not guided by any minimum age, simply depending on the amount of taxable income.

Income Tax in the UK

In the United Kingdom, more than 25% of all income tax revenue is provided by the top 1% of tax payers (i.e. the highest earning tax payers). In addition, the top 50% of taxpayers earning the highest incomes pay off about 90% of all income tax revenue.

For the government, income tax is the highest earning source of money. The National Insurance Contributions is the second largest while Value added Tax and Corporation tax are the third and fourth respectively.

Every individual has a personal allowance income tax, with this amount being tax-free in each tax year. Under 65s making an income of less than £100,000 is £11,500 for the 2017/2018 tax year.

Value Added Tax in the UK

The Value Added Tax (VAT) is tax which is levied on most of the goods and services offered by businesses in the UK registered with VAT. When such a registered business makes a sale to another business or to a regular customer, VAT is charged.

The rate of VAT paid depends on the goods and services provided by the business. Also, when the registered businesses purchase goods and services, the VAT they paid can usually be reclaimed.

Corporate Income Tax

Many companies consider the UK corporate tax system as a territorial system owing to the application of a broad selection of tax treaties combined with dividend exemptions. Companies based in the United Kingdom can be taxed on their worldwide profits except they choose to opt out as non-UK permanent establishments (PEs). Non-resident companies are only required to pay UK corporate tax which can be attributed to a UK PE and UK income tax.

A company which is operating from outside the UK is subject to UK corporation tax on the trading profits of a UK PE. Other income from UK sources received by a non-resident company will pay income tax at the current 20% basic rate, without any allowance.

Personal Income Tax

An individual residing in the UK will be taxed on both their capital gains and worldwide income. Persons who are not residents in the UK will however be taxed on UK sourced income alone, and not on capital gains, whether or not the asset is located in the UK.

Special rules also exist for capital gains tax and income belonging to an individual who is a non-UK resident and returns every five years to the United Kingdom. For individuals who are resident but not domiciled in the UK, all of their non-UK capital gains and investment income will only be taxed if remitted to the UK.

Personal Income Tax Rates

Income tax is charged at progressive rates. Higher bands of income therefore charge higher rates of income tax. Personal income tax rates are levied on total income coming from investment and earned sources, with certain deductions and allowances subtracted. The final amount is usually referred to as taxable income for an individual, with graduated income tax rates that vary slightly depending on the source of the income – earning or investments.

Remittance-Based Taxation

Choosing to be taxed on remittance basis means that individuals will be subject to UK tax on both UK source income and the gains on assets located in the UK and non-UK source income and proceeds from assets outside the UK as long as they are remitted to the UK.

Income or gains are remitted to the UK when the funds are sent into the UK or used to purchase goods and services in the UK. The remittance basis to apply needs to be chosen by the individual on an annual basis on the UK tax return.

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Published on 16th June 2017

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