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According to HMRC, the UK is reducing the corporate income tax rate from 20% to 17%, by the year 2020. The tax free personal allowance is also increasing every year.

The following topics will be discussed in this article:

How does income tax work in the UK? What are the personal income tax bands and their rates? 

How is personal income taxed in the UK? (Income tax and National Insurance)

Anyone employed in the UK is subject to income tax, and for the majority of working people this rate is set at 20%. Fortunately in the UK there is a substantial tax free allowance, which means if you earn a wage low enough, you will not be taxed. Currently, the tax free personal allowance is £12,500, which is one of the most generous allowances in the EU. You are only taxed on your earnings above this allowance. For example if you earned a gross wage of £16,000 in the tax year 2019/20, you would only pay income taxes on £3500 of that wage (at the standard 20% rate).

National insurance contributions have to be paid by anyone employed in the UK, unless they earn a wage under £8,632 per year, an amount known as the Primary Threshold. You will pay 12% of your earnings as National insurance contributions above this limit and your employer (this could be your LTD company) will pay an additional 13,8%, but because this threshold is also within the personal allowance, you will essentially pay no NI contributions or tax if your annual wage is below this amount.

Current income tax rates (bands)

In our current tax year 2019/20, you will be taxed 20% if your income is between £12,501 and £50,000, 40% if your income is between £50,001 and £150,000 and 45% if your income exceeds £150,000 per year.

 

What is Corporation tax?

Corporation tax is the tax paid by every active legal entity in the UK (including LTDs). It has been at 19% since 2018. Corporation tax is paid on the profits of your company.

Below is a list of what you must do to pay corporation tax in the UK (As stated by HMRC)

  • Register your business for corporation tax in the UK. This is a simple procedure that requires using the UK government portal.
  • Archive all the documents that the company issues and receives and prepare your annual tax returns. This will allow an accurate and reliable calculation of the tax you’re due to pay. You must keep your records for at least 5 years after the January 31st submission deadline of the relevant tax year. This is very important, as HMRC can check your records to make sure you’re paying the right amount of tax. 
  • Pay your corporation tax once a year or inform HMRC that your company will not pay tax in a given year e.g. operating at a loss/breaking even during that year (another example of this could be if the entire revenue of the company was paid in the form of directors’ salaries). The deadline to pay you’re corporation tax is usually 9 months and one day after the end your accounting period. You’ll receive dates from HMRC about when your accounting period is after you’ve registered for corporation tax.
  • File a company tax return, on time! The deadline for your tax return is 12 months after the end of your ‘accounting period’. You will incur penalties if you miss the deadline! The penalty is £100 if your tax return is up to 3 months late and more if it’s later than this.

In the current tax year (2019/20), the corporation tax rate is set at 19% and will usually be paid against the company’s profits or on dividends paid by the company at the end of the tax year.

So, what has changed?

As mentioned previously, the tax free personal allowance threshold has increased to £12,500 per year. The upper limit for the basic tax rate (20%) has also increased from £46,350 to £50,000. More information on this topic is available on the British Government Website.

The threshold in which you are free from paying national insurance also increased from £8,424 to £8,632 per year. If the income you receive in the UK is below this amount, then you will not pay any income related taxes.

Additionally, under existing government plans, the corporation tax rate is set to fall to 17% by 2020. This is great news for your fledgling business and other existing businesses in the UK. This also means the UK will have the lowest corporation tax rate in the G20! 

If you have any questions related to the upcoming tax changes or you’re thinking about registering your own LTD company, then please either write to us or arrange a free consultation with one of our experts. We will be happy to assist you and answer any questions you may have.

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Glossary

Word/term Definition/description
Corporation A firm that meets specific legal requirements to be recognized as having a legal existence, as an entity separate and distinct from its owners.
Dividend(s) A sum of money paid to the shareholders of a company, usually out of the profits.
Entity (in business) Any organisation or business that can be subject to legal rights and obligations as a separate body. A corporation is a common example of a business entity.
Generous Used in this sense as large, ample or plentiful.
Gross Used to describe an amount that is without deductions (e.g. from tax or expenses).
HMRC Her Majesty’s Revenue and Customs – Government body responsible for the collection of taxes and NI.
Majority The greater part or number of something.
Portal (computers) A website that has information from a variety of sources in a uniform format. www.gov.uk  is an example of a portal.
Revenue The total amount money a business receives from sales of goods/services/investments (doesn’t take into account business expenses) Distinct from net income, which is essentially the profits the company makes.
Substantial See generous.
Threshold A benchmark or limit beyond or below which a different state of affairs exists. E.g. Going beyond the limit of the distance selling threshold, requires registration for VAT.