The information below pertains to the tax year 2009/10, being the year from 6 April 2009 to 5 April 2010. It is correct at the time of being posted onto the website. The information is for your guidance only and you should consult a qualified accountant before taking any action based upon it. Andrew J Geary cannot accept liability for any action which may be taken as a result of incorrect or out-of-date information.
Your personal allowance, being the amount of your income which you may receive tax-free, depends on your age:
|75 or over
The higher allowances for those aged 65 or over are gradually reduced as your income exceeds £22,900 until they come down to the same amount as the allowance for the under 65s.
Subject to the special rates of tax for savings income and dividends (see below), your income above the personal allowance is taxed at the following rates:
So, if you are of working age, you are a higher-rate tax payer if your gross income exceeds £43,875.
The first £2,440 of savings income is taxed at 10%, the remainder at 20% unless you are a higher-rate tax payer, in which case the savings income falling within your higher-rate band is taxed at 40%
Dividends are taxed at 10% and not 20% if they fall within your basic-rate tax band, and at 32.5% and not 40% if they fall within your higher-rate tax band.
What income is taxable ?
Virtually all ! Betting and lottery wins, and income from premium bonds, are not taxable. Nor is interest received from cash ISA accounts.
The state pension and many other state benefits such as jobseeker’s allowance and carer’s allowance are taxable. Other state benefits such as attendance allowance, child benefit, and maternity allowance, are not taxable. Tax credits are not taxable. Payments from employers’ or private pensions are taxable unless they constitute a tax-free lump sum.
Rental income is taxable and must be declared, even if it is offset entirely by mortgage interest so you have no tax to pay, unless you are renting a room in your home for less than £4,250 a year in which case you may claim rent-a-room relief.
Business income derived from a sole tradership or a partnership is taxed in the same way as employment income, except that you pay less national insurance (see below). Business income derived from a company you own is taxed either as a salary or a dividend. The company itself is taxed on its profits as a separate entity (see below).
You pay national insurance between the ages of 16 and 65 (60 if you are a woman).
If you are an employee, unless your employer is “contracted out” of the state earnings-related pension scheme (see below), you pay 11% on your income between £110 and £844 a week (£477 and £3,657 a month), and 1% on your income above £844 a week (£3,657 a month). Your employer pays a flat 12.8% on your earnings above £110 a week (£477 a month).
If your employer is “contracted out”, your 11% reduces to 9.4% and the employer’s 12.8% reduces to either 9.1% or 11.4%.
If you are self-employed or a partner in a business partnership, you pay a flat £2.40 a week, which is known as Class 2 national insurance. You also pay a profit-based Class 4 national insurance, which is 8% of your business profits between £5,715 and £43,875, and 1% of any profits above £43,875.
Capital gains tax
You are chargeable to capital gains tax on the profit you make from the sale of such capital assets as second homes, rental properties, certain investments, businesses, works of art, etc. There are important reliefs and exemptions, particularly for businesses. These are complex and you should consult a qualified accountant if you are considering selling a business or part of it. Generally you will not be charged capital gains tax on the sale of your main residence, even if it has been let for part of the period of ownership.
The first £10,100 of your capital gains in the year are exempt from tax. Thereafter, the gains taxed at a flat 18%. You cannot set your personal allowance against a capital gain.
The first £325,000 of your estate at death is charged at a “nil rate” of inheritance tax, unless you leave your estate to your surviving spouse or civil partner, in which case it is wholly exempt. Inheritance tax is charged at a flat rate of 40% on the chargeable value of the estate above the nil-rate band.
There are rules which treat any gifts you have made in the seven years preceding your death as part of your estate at death.
Again there are important reliefs for business assets.
Beware of clever schemes to avoid inheritance tax. The present government has been known to enact legislation to block inheritance tax schemes retrospectively. The schemes are usually impossible to undo if circumstances change.
Value added tax
Value added tax (VAT) is a tax on business sales or fees. It is charged at 15.0% (reverting to 17.5% in 2010) of taxable output, and is added to that output, thus making your sales or services more expensive, unless your customer can recover the VAT.
The rules as to what constitutes taxable output are complex. It is best to assume your sales or fees will be taxable and to consult an accountant when you start your business.
The VAT threshold is £68,000. The relevant figure is your combined sales or fees from all of the taxable businesses in your ownership, in any twelve month period (not just your financial year). If you have to register for one business, you register for all. You must register for VAT within one month of exceeding the threshold.
If you are registered for VAT, you may recover the VAT on your expenses, unless you are a partially exempt business, in which case consult an accountant !
You may voluntarily register for VAT. It is usually worth doing so if your customers can recover the VAT which you will charge them, because you can then recover the VAT on your costs without having to reduce your sale prices.
Corporation tax is payable by companies on their profits. The rates are:
|On profits up to £300,000
|On profits between £300,000-£1,500,000
|On profits over £1,500,000
The £300,000 and £1,500,000 thresholds are divided by the number of companies which the shareholders control. This has the effect of taxing a shareholder’s group of companies as if it were one company, and prevents the reduction of tax by multiplying companies.