When you just start out as a business owner in a new country, doing your taxes can seem like an irksome job. And we don't blame you, it can get confusing to understand the taxation system of a new place- especially when it comes to income taxes for businesses.
But here's the deal - regardless of your fear attached to the taxes, you are required to pay a slice of your earnings to the government. This is a legal requirement, and failure to do so can get you in some big trouble. So. Whether you are just starting your business or looking to expand, this guide will help you navigate the complexities of income tax in the UK.
What is income tax?
Income tax is a part of your earnings that you pay to the government. They use this tax money towards development like healthcare, education and infrastructure
So, if you own a business in the country, you must pay income tax on whatever earnings you made throughout the fiscal year.
Now, the taxes you pay are not constant as it is calculated as a percentage of your taxable income.
This means that the more you earn, the more income tax you pay. The UK government has a tax band structure which can help you in deciding the amount that you will be paying to the government.
You also need to note that income tax is not the only tax that UK firms need to pay. Taxes such as National Insurance and Value Added Tax(VAT) may also be applicable, which depends on the size and type of your company.
Who pays income taxes in the UK?
So far, it's clear that if you are running a business in the UK, you will be paying income tax. Now, if we consider a situation where you will be running a business in the UK from your home country - even in this situation you will have to pay income tax as you are using the resources of the country to earn profits.
There are three ways to determine if you are a UK resident for tax purposes:
- You are a resident - who has spent 183 days or more in the UK during the tax year
- You are a resident - if your primary residence is in the UK and has at least 91 days there in total, including 30 days during the tax year.
- You are a resident - if you work full-time in the UK for 365 days with no notable gap.
Who is exempt from income taxes in the UK?
Most people in the UK are eligible for a personal allowance of tax-free income. This is the amount of income you can have before you pay tax. Additionally, most people in the UK receive a personal allowance of tax-free income. This is the maximum amount of money you can have before paying taxes. Furthermore, if you qualify for tax reliefs available, it might reduce the amount of tax you pay. There are some cases where you can be exempted from paying income taxes in the UK.
- Personal allowance: Every resident in the UK is entitled to a specific amount of tax-free income every year. This is known as a personal allowance. The personal allowance for the tax year 2023/2024 is £12,570. This indicates that if your income is less than this level, you will not be required to pay income tax.
- Low-income earners: Individuals earning less than the personal allowance may be exempt from paying income tax. Furthermore, if you are someone who is earning less than a particular amount, then you may also be eligible for tax credits or other forms of financial assistance.
- Charities: Charities that are registered in the UK are exempted from paying income tax on their activities.
- Pensioners: Pensioners who are retired and are living on a fixed income are also exempted from tax reliefs or other forms of financial support.
It's important to note that tax regulations can be complicated and subject to change. At any point, if you feel confused regarding your tax decisions, speak with a professional who knows this the best!
Earnings in the UK that are subject to income taxes
There are certain types of income attract taxes. Here's a breakdown of all:
This is something that you earn from your employment as salary, wage or bonus. If you are employed in the UK, your employer will withhold income tax and National Insurance payments (NICs) from your pay before the final payment comes in your hand. These deductions are done under your tax code and are decided by HMRC.
You must be wondering what the tax code is. Well, it is a code determined by several criteria, including your tax-free personal allowance, any deductions or allowances to which you are entitled, and if you have any additional sources of income. Usually, your employers have this code and they use it to understand the amount of income tax and NIC to deduct from your pay.
Now there's an additional kick to this situation - it might be possible that you are involved in more than one occupation and you may have more than one source of income. In such a case, you may be required to pay additional income tax and National Insurance contributions. If you make more than a particular amount or have other sources of income that are not taxed through PAYE, you must also file a self-assessment tax return.
If your employer gives you any advantages or perks, like maybe you get a company car to commute or private health insurance - then these benefits are also taxed. The money you will pay towards taxes is determined by all these aspects and the nature of the benefits you receive.
In summary, employment income is a major source of income for many individuals in the UK, and it's important to understand your tax obligations and how they're calculated to ensure you pay the correct amount of tax.
Now comes the point of being self-employed. So what if you are someone who is running their own company? Then, in such a case, you are considered a self-employed individual by the tax authorities. In general, freelancers, contractors, sole proprietors and business owners are considered self-employed people.
If you are your own boss in the UK, then you need to calculate and pay your income tax and NICs. This will require you to register with HMRC and Customs as a self-employed individual and you will be filing an annual self-assessment tax return.
Your tax bill will be completed by subtracting your allowable expenses from your total income. Allowable incomes are those incurred solely for your business, such as office rent, equipment and travel expenses.
The amount of income tax you will pay on your self-employment earnings will depend on your total earnings and your tax-free personal allowance. Self-employed individuals pay based on the tax slabs they fall under. We will be discussing the tax slabs and how much you will be expected to pay in the next section of the blog.
You must also pay Class 2 and Class 4 NICs on your self-employment income. This will be in addition to the income tax. It comes with a pretty simple flat rate of £3.05 per week.
If this amount goes beyond the threshold, then you are expected to pay £3.15 a week or £163.80 a year.
Class 4 contributions are calculated as a percentage of your profits and you will be paying them when your profits go beyond £12,570 per year. Currently, self-employed individuals are paying 9% on profits between £12,570 and £50,270, and 2% on profits over £50,270 for Class 4 contributions.
Tip for smooth tax payments: Keep up-to-date records of your income and expenses, as well as any receipts or invoices that are linked to your company. Why so? Well, this is because you will be expected to calculate all your earnings and expenses to pay taxes. Beyond that, accurate records can make the process of self-assessment tax returns a breeze.
While this may seem like a lot, it's not! You are simply making your tax work easier in the long run.
Pension income refers to the payments received by individuals who have contributed to a pension plan during their working life. In the UK, pension income is subject to income tax, which means that individuals who receive pension income may need to pay tax on it.
Pension income is the amount of money earned by those who have contributed to a pension plan during the time of their employment. Pension income is subject to income tax in the UK, which means that people who receive pension income may be required to pay taxes on it.
The amount of income tax paid on pension income is figured by the individual's overall income and tax-free allowance. Although this happens only in some cases, this type of income can be taxed at a higher rate than other sources of income, such as a job or self-employment income.
In the UK, there are different types of pension programmes, which include employment pensions, personal pensions, and state pensions. Employers establish workplace pensions which can be defined benefits or defined contribution plans. Generally, individuals set their personal pensions, whereas the government provides state pensions.
When an individual reaches retirement age, they can choose to take their pension income in several different ways. They may choose to receive a regular income, known as an annuity, or they may choose to take a lump sum payment. In some cases, individuals may also choose to defer taking their pension income until a later date.
You must already be aware of what Rental income is. Typically, rental income is also subject to income tax - which means that individuals who receive rent must also pay income tax.
Now this amount that you are required to pay is determined by the individual's overall income and tax-free allowances. The tax rate may differ depending on the quantity of rental revenue collected and any permissible expenses that can be deducted from rental income.
Some examples of allowable expenses are mortgage interest payments, property repairs and maintenance, property management fees and insurance premiums. Make sure that you are also keeping a record of these rental property expenses to calculate exact tax liabilities.
If you have some type of rental income, you are required to report it to HMRC and may be required to file a self-assessment tax return. Don't take this lightly as you will be fined in case of negligence or inaccuracies.
Investment income refers to the income earned by individuals from their investments, such as stocks, bonds, mutual funds, and savings accounts. In the UK, investment income is subject to income tax, which means that individuals who receive investment income must pay tax on it.
The amount of income tax paid on investment income depends on the individual's total income and tax-free personal allowance. The tax rate may vary depending on the type of investment income received, such as dividends or interest, as well as the amount of investment income received.
Individuals who receive investment income must report it to HM Revenue and Customs (HMRC) and may need to complete a self-assessment tax return. It's important to keep accurate records of all investment income and any associated expenses or deductions, such as fees paid to investment advisors or trading fees.
Some types of investment income may be subject to special tax rules or reliefs. For example, individuals may be eligible for an annual tax-free allowance of up to £2,000 on their dividend income, or they may be able to claim tax relief on certain types of investment, such as Enterprise Investment Schemes (EIS).
Income tax slabs for 2023-24 in the UK
The income tax slabs for 2023-24 in the UK are as follows:
- Tax-free personal allowance: £12,570
- Basic rate: 20% on income between £12,571 and £50,270
- Higher rate: 40% on income between £50,271 and £150,000
- Additional rate: 45% on income above £150,000
It's important to note that these rates are subject to change, and may be adjusted in response to economic conditions or changes in government policy.
Personal tax allowance and deductions in the UK
Now, let's talk about personal tax allowances and deductions. Till 2028, the basic personal allowance is £12,570. This simply means that there is no tax assessment on earnings up to this amount. This amount is the same for everyone, but it gets reduced if you earn more than £100,000. Additionally, if you make £125,000 or more in a year, you will have no personal allowance and you will be taxed on your entire income.
Moving on, there are various tax breaks available for business spending. For example,
- If you travel for business, you can claim 45p per mile for the first 10,000 miles and 25p per mile after that.
- You can also deduct expenses for transportation, lodging and food. If you have to wear a uniform or protective clothing at work, you can also claim cleaning and replacement costs.
- There are also tax breaks for professional affiliations and expenses paid while working from home, such as heating and lighting.
The good news is that these deductions can be enjoyed by both, employed and self-employed individuals. But, you need to make sure that you have the receipts for these at the back of your pocket!
While employees must apply for HMRC online to charge their tax code, the self-employed must report their company expenses and tax deductions when filing their returns.
Tax refunds in the UK
So, if you've paid too much income tax during the tax year, you may be entitled to a refund from HM Revenue and Customs (HMRC). This can happen if you've had multiple jobs, didn't work the full tax year, or if you're eligible for certain tax reliefs.
So, tax returns are in response to the payments that you have made over the financial year. You get tax returns if you have paid taxes on time or maybe at times you have paid too much to the government. This can happen if you have worked many jobs, did not work the entire tax year or if you qualify for specific tax breaks.
To receive your tax returns, you will need to file a self-assessment tax return or contact HMRC. They will examine your tax payments and notify you if you are due a refund. If you are, then the money will be sent to you straight into your bank account.
But here's something to bear in mind - Even if you have paid too much tax, you will not receive your refund automatically. You will be filing a claim with HMRC where you are expected to show clear records of the payments to back up your claims. These records are like proof of your payments, and you can provide payslips or receipts for the same.
The great thing about getting a tax refund is that it's a very straightforward process. Also, it's worth checking what kind of returns you are entitled to. Who knows, you might have some extra cash waiting for you.
Tax fines in the UK
Let's admit it, tax fines can be a real strain on your finances. On top of that, tax fines in the UK are quite strict and can cause a lot of inconveniences. HMRC can hit you with successive fines if you fail to comply with the tax regulations.
For late tax returns, you can be fined £100 right off the bat, even if you don't owe anything towards the taxes. Another 3-month delay can charge you a £100 fine. Now, if you keep on delaying this, HMRC will charge you successive penalties which can disturb your finances to an extent.
So, if you are self-employed and filed a self-assessment tax return to work out your income tax, you can check how much your penalty will be on the UK government's website.
There are also penalties for errors on your tax returns or deliberately providing false information. These penalties can range from a simple warning to fines up to 100% of your tax due. This may also end up with legal action!
UK income taxes for foreigners
If you are a foreigner living in the UK and paying taxes, you will need to pay taxes on all the money you make worldwide. But don't worry, the Brits have made deals with more than 100 countries to make sure you are not being taxed twice. For example, if you work in another country and pay taxes there, you may be eligible to recover a portion of those taxes back.
Although there are certain differences in how income from pensions, rental properties and certain offshore jobs are taxed, you'd still be able to get the best out of the UK's taxation system. So, make sure to look into those that apply to you!
With that note, we will wrap up this guide for you. We hope now you have a better idea of managing your income tax and getting the best out of it. If you stumble upon any challenges along the way, make sure to seek the right guidance and get an expert on board with you. They know it the best!
For more content related to financial advice, explore wamo and its services to keep up with the UK's financial landscape as a small business owner.