The Four Types of Taxation

Corporation tax

Corporation tax is paid by limited companies on their profits.

Corporation tax is not payable by the self-employed but does apply to the following organisations, even if they are not limited companies:

  • members' clubs, societies and associations
  • trade associations
  • housing associations
  • groups of individuals carrying on a business but not as a partnership, eg co-operatives

There are two rates. The two rates of corporation tax - the small companies' and main rate - relate to a level of profit.

When a company's profit level changes from the small companies' rate to the main rate, marginal relief is available to ease the transition.

The table below shows the rates for 2013/14.

Profits Rate applied Rate payable on profits earned from 1 April 2010
Up to £300,000 Small companies' rate 20 per cent
£300,001 - £1,500,000 Marginal relief from main rate between 23.75 per cent
£1,500,000+ Main rate 23 per cent

 

Ring fence companies

*For companies with ring fence profits (income and gains from oil extraction activities or oil rights in the UK and UK Continental Shelf) these rates differ. The Small Profits Rate of tax on those profits is 19 per cent and the ring fence fraction is 11/400 for financial years starting 1 April 2008, 2009 and 2010. The main rate is 30 per cent for financial years starting on 1 April 2009, 2010 and 2011.

Capital Gains Tax

CGT is a tax on capital 'gains'. If when you sell or give away an asset it has increased in value, you may be taxable on the 'gain' (profit). This doesn't apply when you sell personal belongings worth £6,000 or less or in most cases, your main home.

You may have to pay CGT if for example, you:

  • sell, give away, exchange or otherwise dispose of (cease to own) an asset or part of an asset
  • receive money from an asset - for example compensation for a damaged asset

You don't have to pay CGT on:

  • your car
  • your main home - provided certain conditions are met
  • ISAs or PEPs
  • UK Government gilts (bonds)
  • personal belongings worth £6,000 or less when you sell them
  • betting, lottery or pools winnings
  • money which forms part of your income for income tax purposes

These are some points to bear in mind:

  • if you are married or in a civil partnership and living together you can transfer assets to your husband, wife or civil partner without having to pay CGT
  • if you make a loss you may be able to make a claim for that loss and deduct it from other gains, but only if the asset normally attracts CGT - for example you cannot set a loss on selling your car against gains from disposing of other assets
  • if someone dies and leaves their belongings to their beneficiaries, there is no CGT to pay at that time - however if an asset is later disposed of by a beneficiary, any CGT they may have to pay will be based on the difference between the market value at the time of death and the value at the time of disposal
  • Each tax year you have an annual tax-free allowance-know as the 'Annual Exempt Amount'. You only pay tax on total net gains above this amount, using the Capital Gains Tax rate for that tax year. 
  • Nearly everyone who lives in the UK will get the Annual Exempt Amount. There are different Annual Exempt Amounts for individuals (including personal representatives) and most trustees. The amounts are set for each tax year. Currently the allowance for most Trustees is half the individual's allowance.

Rates for Capital Gains Tax

2013-14

·       18 per cent and 28 per cent tax rates for individuals (the tax rate you use depends on the total amount of your taxable income, so you need to work this out first )

·       28 per cent for trustees or for personal representatives of someone who has died

10 per cent for gains qualifying for Entrepreneurs' Relief

Inheritance Tax

A tax on the value of a person's estate on death and on certain gifts made by an individual during their lifetime. Broadly speaking your estate is everything you own at the time of your death, less what you owe. It's also sometimes payable on assets you may have given away during your lifetime. Assets include things like property, possessions, money and investments.

The inheritance tax threshold is the amount above which inheritance tax becomes payable. If the estate, including any assets held in trust and gifts made within seven years of death, is less than the threshold, no inheritance tax will be due on it.

It only applies if the taxable value of your estate is above the threshold which for 20013/14 tax year is £325,000. It is only payable on the excess above this nil rate band.

The rate at which Inheritance Tax is chargedon death  is 40%.

Income tax

Income Tax is a tax on income. Not all income is taxable - and you're only taxed on 'taxable income' above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax bill - and in some cases mean you have no tax to pay.

Taxable income includes:

  • earnings from employment
  • earnings from self-employment
  • most pensions income (State, company and personal pensions)
  • interest on most savings
  • income from shares (dividends)
  • rental income
  • income paid to you from a trust

Non-taxable income

There are certain sorts of income that you never pay tax on. These include certain benefits, special pensions and income from tax exempt accounts. These are ignored altogether when working out how much Income Tax you may need to pay.

Income Tax rates 2013-2014 by tax band and type of income:

Income Tax band Income Tax rate on earned income (see note) Income Tax rate on savings Income Tax rate on dividends
£1 to £2,790
Starting rate:
Not available 10%*  N/A see basic rate band
£1 to £32,010
Basic rate:
20% 20% 10%
£32,011 to £150,000
Higher rate:
40% 40% 32.5%
Over £150,000
additional rate
45% 45% 37%

 

 

Because the rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account, if your non-savings income is less than the starting rate for savings limit (£2,790) - or if savings and investments are your only source of income - your savings income will be taxed at the 10 per cent starting rate up to the limit. But if you already have non-savings income which takes you above the starting rate, all of your savings will be taxed at the 20 per cent basic rate.

 

Remember, the tax band applies to your income after your tax allowances and any reliefs have been taken into account - you're not taxed on all of your income.

 

'Non savings income' includes income from employment or self-employment, most pension income and rental income.

 

'Dividends' means income from shares in UK companies.

 

Savings and dividend income is added to your other taxable income and taxed last. This means you pay tax on these sorts of income based on your highest Income Tax band.

The information given does not provide specific advice and may not be suitable to your individual circumstances.

 Please not that the Financial Services Authority do not do not regulate some forms of Trust products & services. These services are provided by our sister company Countrywide Tax & Trust Corporation Ltd