Income Tax: Obligations, Rates, and Registration

Company LawTax
Written By Tanisha Shah

What is Income Tax?

Income tax is a tax you pay on your earnings. It is chargeable on the following forms of income:

  • money earned from employment (exceeding the standard tax allowance of £12,570);

  • profit made from self-employment;

  • some state benefits;

  • government grants and support payments such as Self-Employment Income Support Scheme, the Coronavirus Job Retention Scheme, the Small Business Grant Fund or the Retail, Hospitality and Leisure Grant Fund;

  • most state, company and personal pensions;

  • work benefits;

  • incomes from a trust; and

  • interest on savings.

You do not pay income tax on the following:

  • the first £1,000 of your income from self-employment - a ‘trading allowance’; 

  • income from tax exempt accounts such as National Savings Certificates and Individual Savings Accounts; and

  • dividends from company shares under dividend allowance.


Who Pays Income Tax? 

Whether or not you have to pay income tax will depend on the type of business structure you run. Income tax is paid by individuals rather than corporate bodies. If you are a sole trader or a partner in a partnership you will pay income tax on your profits. If you run or work for a limited company you will pay income tax from your salary. This tax will be payable after deducting all allowable expenses such as salaries, machinery or equipment and office rent. As per the Income Tax (Trading and Other Income) Act 2005, income tax will not be payable by firms as they are not considered a separate entity from the partners.

Rate of Tax

Tax rates will vary depending on the particular band you fall under. There is a Personal Allowance that protects the first £12,570 made from income tax. Personal Allowance does not apply to profits over £100,000. Additionally, it will go down by £1 for every £2 of income above that sum. 

 

Band

Taxable Income

Tax rate

Personal Allowance

£12,570

0%

Basic rate 

from £12,571 to £50,270

20%

Higher rate

from £50,271 to £125,140

40%

Additional rate

above £125,140

45%



How to Register? 

Most people pay tax through the PAYE system. It allows employers or pension providers to take out an appropriate amount of money out of your wage or salary on the 22nd of each month. 

If you’re self-employed or have a high income, you may pay income tax and National Insurance through Self Assessment and send a tax refund each financial year. 

You will need to:.

  1. Register for a Self Assessment and Class 2 National Insurance through your business tax account. 

  2. Set up a Government Gateway user ID and password. 

  3. You will then receive a Unique Taxpayer Reference (UTR) and you will be notified to send your tax return before it is due. 

To register on the government website, use this link. 

Consequences of non-payment

HMRC will charge you a penalty if you fail to send your Self Assessment tax return or fail to pay your tax bill. The penalty will be a percentage of the original amount owed plus an additional interest if you don’t pay straight away. 

You can check whether you will be penalised and how much the penalty will be using a penalty calculator on the government website under this link. 

Other Factors

Carrying forward losses onto a new fiscal year

Declaring a loss at the end of a fiscal year may be beneficial to a business. It can be used to transfer a tax loss onto the next fiscal year to offset a profit. In turn, tax for the next fiscal year will be smaller. Paying less tax in the first few years of operating may be especially beneficial for a startup as it enables  the retention of more money from the profit, to put back into developing the business. 

Capital gains tax 

In some cases, an alternative to an income tax can be a capital gains tax. It is a tax paid on profit made from selling an asset that has increased in value. 

For more information, please use this link.

Author: Zofia Bonarowska -

Author: Zofia Bonarowska -

In partnership with

Tanisha Shah
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