UK Tax Law encompasses a wide range of taxes, each with its own rules and regulations. Understanding these taxes is essential for compliance and effective financial planning. Below are come of the common topics you will study in Tax Law.
1. Income from Employment
Income from employment in the UK is subject to Income Tax and National Insurance contributions. Employers deduct these amounts from employees' wages through the Pay As You Earn (PAYE) system. Taxable income includes wages, bonuses, certain benefits like company cars, and any non-exempt expense reimbursements. The tax rate depends on the income bracket, with higher earners paying a higher percentage. Special rules apply to directors and certain employees regarding benefits in kind and expenses.
2. Income from a Profession or Trade
This concerns the taxation of profits from self-employment, including income from sole traders and partnerships. Individuals must declare this income through a Self Assessment tax return. The taxable amount is the profit, which is the business income minus allowable expenses. Expenses must be wholly and exclusively for business purposes. The tax rates align with the income tax rates for individuals, but self-employed individuals are also responsible for their National Insurance contributions.
3. Income from Land
Income from land, often referred to as rental income, is taxable. Landlords must report this income on their Self Assessment tax return, and they can deduct certain expenses related to the property, such as maintenance and repair, but not improvement costs. The Rent-a-Room Scheme allows for a tax-free allowance on rental income from a lodger in your home. Property letting in the UK has specific rules, including considerations for furnished holiday lettings which have their own set of tax reliefs.
4. Capital Allowances
Capital allowances provide tax relief for the depreciation of certain types of assets, including equipment, machinery, and business vehicles. These allowances reduce the taxable profit of a business by allowing the cost of assets to be written off against the taxable income. Different types of capital allowances exist, such as Annual Investment Allowance (AIA), which allows for a 100% deduction up to a certain limit.
5. Capital Gains Tax
Capital Gains Tax (CGT) is charged on the profit from the sale of an asset that has increased in value. It is the gain that's taxed, not the amount of money received. There are annual tax-free allowances and different rates for residential property and other assets. Special rules apply to the sale of one's home (Private Residence Relief), and certain assets are exempt.
6. Inheritance Tax
Inheritance Tax (IHT) is paid on an estate (the property, money, and possessions) of someone who has died. There is normally no tax if the estate is valued below the IHT threshold or everything above the threshold is left to a spouse, civil partner, charity, or community amateur sports club. The standard IHT rate is 40% on amounts over the threshold. The Residence Nil Rate Band (RNRB) provides an additional allowance when a home is passed to direct descendants.
7. Corporation Tax
Corporation Tax is levied on the profits of limited companies and other organisations. Companies are responsible for calculating their tax liability and filing a Corporation Tax Return (CT600). Rates vary depending on the profit levels, and special rates apply to certain types of companies, such as ring-fenced companies (oil, gas, and mineral extraction).
8. Value Added Tax (VAT)
VAT is a tax charged on most goods and services provided by VAT-registered businesses in the UK. It also applies to some goods and services imported from outside the EU. Businesses add VAT to the sale price of goods and services, and VAT-registered businesses can reclaim any VAT they've paid on business-related goods and services. There are different VAT rates, including standard, reduced, and zero rates, depending on the type of goods or services.
9. Tax Avoidance
Tax avoidance involves using legal means to minimise tax liability, such as investing in tax-efficient schemes. While tax avoidance is legal, aggressive tax avoidance schemes that stretch the law to gain a tax advantage that Parliament never intended can be challenged by HMRC. There's a thin line between avoidance and evasion, the latter being illegal and involving dishonest practices to not pay taxes owed.
These topics are foundational topics for anyone who wishes to specialise in tax law and taxation. Understanding each of these areas is crucial for navigating the complexities of UK Tax Law, ensuring compliance, and optimising tax liabilities.
