Income tax, national insurance, VAT – you’ve constantly heard them mentioned, but when might you have to pay them? Here we give a very brief overview of the main taxes.

Future articles will look at the individual taxes, including tax rates and allowances, in more detail.

Direct taxes on income and profits

• Income Tax

This is payable by individuals on their income. If you are an employee, income tax is due on your salary (and also benefits you receive), although your employer will usually deduct this before paying you. If you run your business through a company and pay yourself a salary or dividend, then income tax is due on these payments. Alternatively, if you have a business but do not use a company, income tax is payable on your taxable profits.

Other examples of amounts on which you suffer income tax are rental income and bank interest (unless from an exempt source such as a cash ISA account).  Generally, assume that you do have to pay income tax on any income unless there is a specific exemption such as for competition winnings.

• National insurance contributions (NIC)
  

NIC is generally payable on earned income such as salaries and trading profits, but also other items including benefits such as a company car etc. There are various different classes of national insurance; Class 1 payable by employees and employers, classes 2 and 4 payable by the self-employed, and class 3 which can be voluntarily paid by individuals, if they do not fit into these categories but wish to retain their entitlements to state pension benefits.

• Corporation tax

If you run a company, the company must pay corporation tax on its taxable profits.

This is in addition to any income tax you have to pay on any salary or dividends you extract from your company, and any national insurance payable on a salary.  However, salary (and the company’s national insurance bill associated with it) is a deductible expense when calculating taxable profits, and so corporation tax.  This is not the case for a dividend, but a dividend does not give rise to national insurance and the income tax rates are lower than for salary.

The issues of how to extract money from a company, and whether a company is the correct vehicle to use to run a business, are complicated and we will deal with them another time.

Direct taxes involving capital items

• Capital gains tax (CGT)
  

You should assume that this is payable whenever you sell an asset that you own. You may not believe this as you may never have paid this in your life. This is because there are specific exemptions and reliefs, for example, sale of your principal private residence (main home) does not give rise to capital gains tax, neither will sale of your car. Also, small items costing (and selling for) less than £6,000 are not taxable in this way. However, if you own a buy-to-let property, then CGT may be payable on the profits of a sale.

• Inheritance tax (IHT)
  

IHT is generally payable on death.  If the value of the assets you own on death, or that you have given away in the seven years leading up to your death, exceeds £312,000, then the excess is liable to IHT.  There are however some exemptions and reliefs, especially for gifts made during your lifetime.

IHT is also very occasionally paid during someone’s lifetime if certain trusts are set up.

Indirect taxes – on assets

• VAT

This is payable on goods and services. As an individual consumer, you will pay this on many products you buy. The idea is that it is a charge levied on the final consumer, so if you operate a VAT-registered business, you may be able to reclaim all or part of the VAT you suffer on your business purchases.

• Stamp duty and stamp duty land tax (SDLT)

You will be most familiar with stamp duty in terms of the charge you have to pay when buying a house. In fact, this charge is actually now called stamp duty land tax, and is payable at increasing rates with increasing value of the property. If you acquire business premises, then SDLT will also be relevant. Other examples of when stamp duty arises include share transfers. Ask your lawyer or accountant if you are concerned about the relevance of stamp duty to your operations.

Given the volumes of tax legislation that exists, this is obviously only a brief overview but one which will hopefully explain some aspects of tax that you have not previously understood.

As with all our information in The Business Lounge, this is not comprehensive tax advice, and may not apply to your specific circumstances; to discuss how these issues affect you, contact your accountant.