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:
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members' clubs, societies and associations
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trade associations
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housing associations
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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 2008/09.
Profits Rate applied Rate payable on profits earned from
1st April 2008
Up to £300,000 Small companies' rate 21 per cent
£300,001 - £1,500,000 Marginal relief from main rate Between 21 per cent and 28 per cent
£1,500,000+ Main rate 28 per cent
Note: if your company is an associated company, ie it controls or is controlled by another company, then the profit levels shown in the table above may be reduced. The Chancellor announced in his April 2007 budget that the small companies' rate will be increased to 22 per cent in 2009/10.
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:
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sell, give away, exchange or otherwise dispose of (cease to own) an asset or part of an asset.
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receive money from an asset - for example compensation for a damaged asset.
You don't have to pay CGT on:
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your car.
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your main home - provided certain conditions are met.
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ISAs or PEPs.
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UK Government gilts (bonds).
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personal belongings worth £6,000 or less when you sell them.
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betting, lottery or pools winnings.
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money which forms part of your income for income tax purposes.
These are some points to bear in mind:
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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.
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you can't give assets to your children or others or sell them assets cheaply without having to consider CGT.
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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.
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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.
For 2008-2009 it is proposed that there will be a single rate of Capital Gains Tax of 18% for individuals, trustees and personal representatives on taxable gains.
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 2008/09 tax year is £312,000 (2008-2009 tax year). It is only payable on the excess above this nil rate band. The rate at which Inheritance Tax is charged 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:
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earnings from employment.
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earnings from self-employment.
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most pensions income (State, company and personal pensions).
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interest on most savings.
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income from shares (dividends).
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rental income.
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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 2008-2009 by tax band and type of income
Income Tax Income Tax rate on earned income Income Tax rate on savings/dividends
band (see note)
£1 to £2,320 Not available 10%* /N/A
Starting rate
£1 to £36,000 20% 20%/10%
Basic rate
£36,001 and above 40% 40%/32.5%
Higher rate:
* If your earned income is less than the starting rate for savings limit (£2,320), your savings income will be taxed at the 10% starting rate up to the limit, rather than the 20 % basic rate. The starting rate limit for savings creates an alternative tax band; it is not in addition to the basic rate limit.
Remember: the tax band applies to your income after tax allowances and any reliefs have been taken into account; you're not taxed on all of your income.
'Earned 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. |
