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Individuals are subject to tax on their earned and unearned income. Set out below are the percentage tax rates and taxable income levels for the year to 5 April 2012:
- Basic rate from GBP 0 to GBP 35,000 - 20%
- Higher rate from GBP 35,001 to GBP 150,000 - 40%
- Additional rate above GBP 150,001 - 50%
In addition there is a 10% starting rate for savings income up to GBP 2,560. If an individual's non-savings taxable income exceeds the starting rate limit, this 10% starting rate will not be available for savings income.
There is a personal allowance (deductible from income of an individual in computing taxable income) of GBP 7,475 (rising to GBP 8,105 from 5 April 2012). This personal allowance is reduced by GBP 1 for each GBP 2 of income over GBP 100,000. Persons aged over 65 are entitled to a personal allowance of GPB 9,940 and those over 75 to an allowance of 10,090. These higher allowances are however restricted where income exceeds GBP 24,000. An allowance of 10% of GBP 7,295 is available to married couples and civil partners where one of the couple is aged over 75, subject to the income restriction of GBP 24,000 above which the allowance is reduced by GBP1 for each GBP 2 of excess income down to a minimum allowance of 10% on GBP 2,800.
An individual who is receiving earned income from employment or self-employment may obtain tax relief from pension contributions made to a personal pension scheme or to a company scheme. However a charge to tax can arise if the total pension input amount (which roughly equates to the amount added into the individual's pension schemes) exceeds a certain amount, which is GBP 50,000 for 2011/12.
A taxpayer is subject to the "lifetime allowance charge" where a pension crystallises (for example when the individual begins to draw the pension) and the value of the pension is above a lifetime amount of GBP 1.8 million for 2011/12 (reducing to GBP 1.5 million in 2012/13). Tax is payable on the excess over this amount at 25%, or at 55% where the amount is taken as a lump sum.
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Capital Gains Tax
Capital gains tax (CGT) is payable by individuals and trusts on gains realised from the disposal of assets. It is payable on the amount by which total chargeable gains for a year exceed the exempt amount which is GBP 10,600 (GBP 5,300 for most trusts) for 2011/12. The capital gains tax is charged on the total taxable gains less allowable losses at a rate of 18% for basic rate taxpayers and 28% for higher rate taxpayers. A husband and wife are taxed separately, but assets can be transferred between them at no gain and no loss for capital gains tax purposes.
There are certain costs and reliefs that can reduce the amount of capital gains tax payable, the most important being entrepreneur's relief which applies to reduce capital gains tax to 10% on the sale of a business, up to a lifetime limit of GBP 10 million for each individual taxpayer. Also, gains on the sale of certain business assets can be "rolled over" against the cost of new business assets acquired in a period between one year before and three years after the sale of the old asset. The cost of the new asset for capital gains tax purposes is reduced by the gain on the old asset, thereby effectively deferring the capital gain until the new asset is sold.
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Inheritance Tax is imposed in the UK on the value of a person's estate at the time of death, and on certain lifetime transfers. The nil rate band for Inheritance Tax for the tax year 2011/12 is GBP 325,000. Inheritance tax (IHT) applies at 40% on the excess of the value of the estate over this amount or at 20% for some lifetime transfers. There is an annual exemption of GBP 3,000 which can be carried forward for one year if unused. From 5 April 2012, a reduced IHT rate of 36% will apply if more than 10% of a net estate is left to charity.
Two important inheritance tax reliefs are business property relief and agricultural property relief. Business property relief is available at 100% on the transfer of a business or an interest in a business or on unquoted shares. Agricultural property relief is available at 100% on the agricultural value of property that was owned or occupied by the transferor, subject to certain conditions.
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Corporation Tax in the UK The UK corporation tax system is being modernised with reductions in the tax rate and exemption for foreign dividends. The government has introduced an option to exempt foreign branch profits and intends to further revise the controlled foreign company provisions. The government is also considering a patent box regime with a reduced rate of tax for income from patents.
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For 2011/12 companies pay corporation tax at 26%. The corporation tax rate is to be reduced to 25% from 1 April 2012. For UK resident companies with taxable profits below GDP 300,000, a lower rate of 20% applies. For companies with tax-adjusted profits between GBP 300,000 and GBP 1.5 million, the full corporation tax applies but with marginal relief which gradually raises the average rate of tax payable to the full rate as profits reach GBP 1.5 million. For corporate entities with associated companies, both profit limits are divided by the number of active companies in the group to reach the threshold at which each company pays the full rate of corporation tax. Corporation tax is payable nine months and one day after the end of the accounting period, but companies with profits over GBP 1.5 million must usually pay tax in installments.
Large companies receive an enhanced deduction of 130% for research and development (R&D) expenditure. From 1 April 2011 small and medium enterprises receive an enhanced deduction of 200% for their R&D expenditure, and the government plans to increase this to 225% from 1 April 2012, subject to EU approval under the state aid rules.
There is also an intangible fixed assets regime for companies under which tax relief is available for intangible assets acquired after 1 April 2002. The government plans to later introduce a "patent box" regime under which companies would pay tax at only 10% on income arising from patents.
Dividends received from UK companies are not subject to corporation tax and foreign dividends are mostly exempt. Income from overseas branches of UK companies is currently taxable, but double tax relief is available for foreign tax paid. For accounting periods beginning on or after 19 July 2011, companies may make an irrevocable election to exempt all their foreign branches from corporation tax on their profits.
The government is consulting on changes to the controlled foreign companies regime, which effectively taxes UK companies on their share of the profits of companies controlled by UK persons and situated in low tax jurisdictions.
The UK has concluded a wide network of bilateral double taxation agreements with other countries to allocate taxing rights and ensure that income is not taxed twice. These agreements also provide for a dispute resolution mechanism known as the mutual agreement procedure whereby the competent authorities in the two countries can resolve situations where taxation arises that is not in accordance with the agreement. Also, the European Union has set up the EU Arbitration Convention, whereby countries can resolve disputes arising for example where one country makes an upward transfer pricing adjustment to the taxable profits of a company and the other party to the transaction is looking for corresponding tax relief in another EU country
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Insurance Premium Tax
In the UK, premiums received under a taxable insurance contract are subject to the insurance premium tax. For non-life insurance the rate of insurance premium tax is 6% from 4 January 2011 but on certain types of policy such as travel or holiday insurance the insurance premium tax is charged at 20%. Life insurance and reinsurance contracts, apart from private medical insurance (PMI) policies, are not subject to insurance premium tax.
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Value Added Tax (VAT)
The VAT is a multi-stage sales tax that applies where a business is making taxable supplies. Businesses making taxable supplies over GBP 73,000 in the past twelve months must register for VAT. The tax is imposed on the value added at each stage, whereby the supplier adds VAT to the price of the supply and can recover VAT paid on the expenses relating to that supply. The intention of the law is that the final consumer (an individual or business that is not registered for VAT) actually bears the burden of the tax, though VAT registered companies must bear significant costs of compliance with VAT.
The basic rate of VAT is 20% from 4 January 2011, with a lower rate of 5% that applies to certain goods and services including domestic fuel and the installation of energy-saving materials. Some items are subject to VAT at a zero rate, including food, water and sewage services, books and newspapers, the sale or long lease of new residential buildings, children's clothing and footwear and some passenger transport.
Services that are exempt from VAT altogether include health, education, insurance and financial services, the sale of land or of a used commercial building, or the lease of a commercial building. Where an exempt service is supplied, the provider cannot recover VAT paid on expenses relating to that supply. In some cases an option to tax (option to waive exemption) is available so the supplier may add VAT to the sale price and recover VAT paid in connection with the supply.
- UK Finance Act 2011
- Image credits: puravida and gracey on morguefile