Income tax - who pays it?
Sole traders, partners, PRs, shareholders
Applicable allowances (income tax)
- Personal allowance - 12,570 GBP
- Annual Investment Allowance (purchased plants/machinery for business purposes) - up to 1mil GBP (lifetime cap)
- First Year Allowance - energy and water saving assets - certain % deductible (“written off”) per year
Income Tax Rates
- Calculate the taxable income by deducting allowances (e.g. personal allowance of 12,570 GBP) from the total income
- Tax the income based on the amount:
- up to 37,700 GBP (basic rate) = 20%
- from 37,701GBP to 125,140 GBP (higher rate) = 40%
- > 125,140 GBP = 45% (additional rate)
Personal Savings rates (income tax)
up to 5,000 GBP with a total income of 17,570 GBP - free of tax
If income is more than 17,570 GBP:
- basic rate - 1,000 GBP free
- higher rate - 500 GBP free
- additional rate - no allowance
Dividends allowance (for all income tax payers)
500 GBP
Dividend tax rates (income tax)
- Basic rate - 8.75%
- Higher rate - 33.75%
- Additional rate - 39.35%
Capital Gains Tax - what is it and who does it apply to?
- the profit you made when you sell/dispose of any asset which has increased in value
- applies to sole traders, partners, and shareholders (including PRs)
Allowable deductions (CGT)
- Costs to maintain the asset
- Costs to protect the asset, e.g. defend the title, file an opposition against a third party
- Costs to sell the asset
- Costs to enhance the asset
Deductible Annual Allowance (CGT)
- all individuals and PRs = 3,000 GBP
- trustees = 1,500 GBP
Reliefs (CGT)
- Roll-over business relief (defers tax, cannot use annual exemption)
- Roll-over relief on incorporation (defers tax, cannot use annual exemption)
- Gift Hold-over relief (defers tax, cannot use annual exemption)
- Business Asset Disposal relief (reduced % CGT due, can use annual exemption)
Roll-over business relief (CGT)
- DEFERS TAX - you will only pay tax when you sell the ‘new’ asset, unless you use another relief
- cannot use annual exemption
- When you sell a business asset and with the money from the sale you buy another business asset
Conditions:
- trading business when you buy the new asset and use the old asset
-use both assets for business
Timeframe:
- buy the new asset within 1 year before the sale of the asset and within 3 years after/from the sale of the asset
When to apply - within 4 years from the end of the tax year when you bought the new asset (or sold the old asset, whichever comes later)
Roll-over tax on incorporation (CGT)
- DEFERS TAX - CGT is deferred at the moment of incorporation; tax is paid on the disposal of shares only.
- CANNOT USE YOUR ANNUAL EXEMPTION of 3,000 GBP!!!
- if a sole trader/partner sells their unincorporated business as a going concern to a third party —> party turns the business into an incorporated entity —> gain is then turned into / = shares in the newly incorporated entity.
HMRC applies the relief automatically.
Business Asset Disposal Relief (CGT)
— ANNUAL EXEMPTION APPLIES!!!
- A reduced rate CGT (14% on chargeable gains up to 1mil GBP from 6 April 2025 – lifetime cap; 10% on gains before 5 April 2025)
- An individual sells their whole business or disposes of certain business assets
- Only sole traders/partners, NOT available to companies.
Conditions:
- Sole trader, partner, who owned a trading business for more than 2 years before the sale
- if you stopped trading, sell the business within 3 years to make use of the relief
- You sell assets used in business
- You sell shares/securities, granted that you are an employee of the company OR officer of the company + the company is trading in the 2 years prior to selling the shares
- You sell shares in a personal company (shares not from EMI) owning at least 5% of shares with voting rights + 5% of the company on winding up and 5% on profits if the company is sold
Gift Hold-over relief (CGT)
- DEFERS TAX
- CANNOT USE YOUR ANNUAL EXEMPTION of 3,000 GBP!!!
- You give away an asset to a third party
- Conditions for business assets - you are a sole trader/partner/shareholder in a personal company who uses the assets for business
- Conditions for shares - they are not in a listed company OR they are in a ‘personal’ company
- Until when to claim relief - within 4 years from the end of the tax year when you disposed of the asset
Result: pay tax once the gifted asset has been sold by the third party
Calculate CGT
- Calculate the chargeable amount subject to tax after deducting the annual exemption of 3,000 GBP and any deductable costs for maintaining, protecting, enhancing or selling the asset
- Consider RELIEFS
- Put together the chargeable amount + income = to see if it is above the basic rate or under the basic rate band of 37,700 GBP
— if < 37,700 GBP = 18%
— if > 37,700 GBP = 24%
Corporation Tax
- tax on any profits and gains made by the company (incorporated entity - e.g. Ltd, Plc)
Deductibles in Corporation tax
- any costs related to running the business – wages, maintenance costs, interest, capital allowances (investment into new plants/machinery)
- NOT dividends!!
Corporation tax rates
Main rate is 25%
- profits > 250,000 GBP - main rate
- small profits < 50,000 GBP = 19%
- anywhere between 50k and 250k GBP - % applied marginally
