The Budget 2014 Debugged (Part 2) - The Many Faces of Tax

There are various incarnations of tax in the money world, and it can be hard to understand them and figure out what form of relates to your work. We at Finnies are here to debug some of the mysteries about tax and help you understand the various types of tax.

Taxes paid by the individual

Income tax

This is a tax on your income. You are only taxed on ‘taxable income’ if you earn over a certain amount of money. Taxable income includes:

·      Earnings from employment (including self employment),

·      Most pensions income (including State, company and personal pensions)

·      Interest on most savings

·      Rental income

On the opposite hand, there are certain sorts of income that you never pay tax on. These include certain benefits, income from tax exempt accounts, Working Tax Credit (WTC) and premium bond wins. These income sources are ignored altogether when working out how much Income Tax you may need to pay.

For a full breakdown of income tax, including thresholds, see this link here.

Capital gains tax

This relates to assets you own, such as shares or properties. This is a tax on the gain of profit you make when you sell, give away or otherwise dispose of something.

Disposing of an asset usually happens when you cease to own it, for example if you sell it, give it away, transfer it to someone else or exchange of it for something else.

The main thing to note is that the amount taxed is the gain you make, not that amount of money you receive for the asset.

See this link for more information.

Value added tax (VAT)

VAT is a tax charged on most business transactions in the UK. Businesses add VAT to the price they charge when they provide goods and services to:

·      Business customers - for example a clothing manufacturer adds VAT to the prices they charge a clothes shop

·      Non-business customers - members of the public or 'consumers' - for example a hairdressing salon includes VAT in the prices they charge members of the public

If you're a VAT-registered business, in most cases you charge VAT on the goods and services you provide or reclaim the VAT you pay when you buy goods and services for your business.

If you're not VAT-registered then you can't reclaim the VAT you pay when you purchase goods and services. When VAT-registered businesses buy goods or services they can generally reclaim the VAT they've paid.

There are three rates of VAT, depending on the goods or services the business provides. The rates are:

·      Standard - 20 per cent

·      Reduced - 5 per cent

·      Zero - 0 per cent

We also published our own separate article on Inheritance tax, and you can view that here.

Taxes paid by companies

Corporation Tax

Corporation Tax is a tax on the taxable profits of limited companies and some organisations including clubs, societies, associations, co-operatives, charities and other unincorporated bodies.

Taxable profits for Corporation Tax include:

·      Profits from taxable income such as trading profits and investment profits (except dividend income which is taxed differently)

·      Capital gains - known as 'chargeable gains' for Corporation Tax purposes

If your company or organisation is based in the UK, you'll have to pay Corporation Tax on all your taxable profits - wherever in the world those profits come from.

If your company isn't based in the UK but operates in the UK - for example through an office or branch (known to HMRC as a 'permanent establishment') - you'll only have to pay Corporation Tax on any taxable profits arising from your UK activities.

We hope you've found this article useful and that we've hopefully helped provide some insight into the many tax variants. Should you have any questions, please feel free to email us or tweet to us @FinniesAccount.