UK tax basics you should know
So you’ve decided to come to the UK and set up a business. There are so many things to think about, one of those is tax, which is enough to put anyone off, even if the UK has one of the most favourable regimes in Europe.
Here we set out some of the main taxes you will encounter as a business owner, and all these will need to be considered in light of your circumstances in the US:
A company is liable to pay corporation tax on it’s profits in the UK. There are two rates, the main rate of 21% applies when profits are at a rate exceeding £1,500,000, the small profits rate at 20%. From 1 April 2015 the rates will be unified at 20%. Both are payable based on an annual accounting period, not a calendar year.
Income tax is generally deducted from an employee’s gross salary on a monthly basis, through an employer-run system known as ‘Pay As You Earn’ (“PAYE”), and automatically paid to HM Revenue & Customs (“HMRC”). An employee will pay income tax a 0%, 20%, 40% and 45% tax, depending on their earnings. The highest rate of 45% applies for all earning above £150,000.National insurance
There are two elements to this tax, employees and employers national insurance.Employees national insurance is deducted along with PAYE from an employee’s gross salary. Up to £41,860 an employee pays national insurance of 12%, above this amount, it is paid at the rate of 2%.
Employer’s are also liable for national insurance at the rate of 13.8% on the gross amount of the employee’s salary.
Value Added Tax or “VAT”
VAT is the UK’s version of sales tax. If a business has annual revenues over £81,000, it must register with HMRC, requiring the business to charge sales tax to its customers or clients. However the flip side is that VAT can be reclaimed on all purchases the business makes, where VAT is included. VAT is a complex area, and the system is undergoing some change across Europe. The standard rate of VAT in the UK is 20% but it depends on the goods and services in question, whether they are supplied to an entity or an individual, and location.Tax reliefs
The UK has in place a broad ranges of tax reliefs. One very popular one is on research & development (“R&D”). R&D tax incentives are available for any business that is carrying out innovative projects, and applies across all industry sectors. For a small and medium size enterprise, it can claim an enhanced deduction for corporation tax purposes of 225% of all qualifying R&D expenditure, and even claim a hard cash refund. There is also a larger company scheme, albeit the relief is less beneficial. Sectors have specific reliefs, so for example in the creative sector, there are Games, Film, High End Television and Animation tax reliefs. And soon a Theatre tax relief.Capital Gains tax
This is generally chargeable on capital gains in a calendar year, and is chargeable at the standard rate of 28%. It is possible to reduce this to 10% by claiming Entrepreneur’s relief, for example by the owner of a business selling his interest in that business.