The UK tax system is complicated and ever changing. In this section we try to give you an understanding of your personal tax situation and issues that can affect your position and liabilities. We start by considering Self-Assessment. As a director of your limited company you are obliged to submit a Self-Assessment Tax Return. This is how HMRC establish your tax position and calculate any tax liability.
As an individual resident in the UK you are entitled to a personal tax allowance; an amount of income that can be earned each year without incurring a tax charge. For 2016/2017 the figure stands at £11,000 (2015/16: £10,600). This figure may be adjusted by HMRC if you have any taxable Benefits in Kind or are in receipt of additional allowances and any adjustments will be reflected in your tax code. You are then able to earn an additional £32,000 in 2016/17 (£31,785: 2015/16) of basic rate income before you fall into the higher rate tax band. If your annual personal income is more than £43,000 in 2016/17 (£42,385: 2015/16) HMRC will assess your tax liability using the higher tax or additional tax rates. The current tax rates in 2016/17 are:
- Basic tax rate: 20% on annual earnings up to £43,000 (2015/16:£42,385)
- Higher tax rate: 40% on annual earnings from £43,000(2015/16 :£42,385) to £150,000
- Additional tax rate: 45% on annual earnings above £150,000
In 2016/17 if you take Dividends from your company, it is the net dividends received that counts towards this limit - this is because the way dividends are taxed changed from 6 April 2016 , compared to 2015/16 and prior years, if you take Dividends from your company, it is the gross dividends received.
It’s important that you are able to estimate your tax situation for two reasons; implementing suitable Tax Planning opportunities early on in the tax-year to optimise your position and; budgeting for the remainder of the year so there are no surprises when you settle your personal tax bill on 31 January.
In this section we look at issues that affect your potential tax liability, explain some specific tax regimes and relief allowances and outline some benefits and statutory payments that may be relevant. All or some of them could have implications for your tax position.
Self-Assessment covers income that hasn’t been taxed through the PAYE system. HMRC operates a strict regime and you need to understand the rules costly mistakes and interest charges.
Dividends are a distribution of income from a company in which you hold shares.
As the director and shareholder of your limited company, can appoint further shareholders. Adding a second shareholder gives them an entitlement to receive Dividends from your company, but there are issues you need to be aware of.
If your company provides you with non-cash benefits, such as gym membership or medical insurance, you may have to pay tax on them. This is in addition to the tax and National Insurance contributions already paid on any cash earnings or benefits through Pay As You Earn (PAYE).
Capital Gains Tax
Capital gains tax (CGT) is generally charged on the profit you make when you sell, or give away, certain assets. These assets tend to be land and buildings, shares and business assets including goodwill.
Inheritance Tax (IHT)
Inheritance tax is charged on the value of your estate when you die, but sometimes it is payable on gifts made during a lifetime.
Usually your company takes pension contributions from your pay before deducting tax, but not National Insurance contributions. You only pay tax on what's left. Whether you pay tax at basic, higher or additional rate you get the full relief straightaway.
Private Residence Relief
Private residence relief is the name given to the tax relief when selling your home, designed to ensure that most people don’t face a Capital Gains Tax (CGT) bill.
If you sell or close your business, you may be able to claim Entrepreneurs’ Relief. This means you only pay 10% Capital Gains Tax (CGT) on any qualifying profits, effectively reducing your tax liability.
Income and business expenses from property
If you let out a property you need to advise HMRC that you receive income from this and pay tax on any profits. There are some important points to consider on how to do this and manage your tax position effectively.
If you are without work or a contract at present you may be able to claim Job Seekers Allowance.
Statutory Payments Available
If you are unable to work due to illness, you may be able to claim Statutory Sick Pay (SSP).There are also statutory payments available for Maternity, Paternity and Adoption.