Notices

UK taxation

From Traderpedia

Taxation never fails to be a complex subject, especially in the realm of professional trading.

Contents

[edit] How is a trader taxed in the UK?

The Inland Revenue is still somewhat confused by professional traders and thus different individuals, somewhat surprisingly, can be treated for tax purposes in various ways, depending on the whim of the local tax office concerned. If you are unsure about how to return your trading profits, simply contact your local tax office and they will make a decision for you based on the evidence you present. If you are lucky you might be able to present your case in such a way that you receive the most cost-effective tax treatment. An accountant who specialises in this area might be of help.

Private investors who play the markets in their spare time are generally liable to capital gains tax on their profits, unless they are trading by Spread-Betting which is free from capital gains tax. In some cases, full-time traders are treated in this way too, often despite their best efforts to convince the Inland Revenue that they are self-employed. Traders who manage to convince the Revenue of this generally trade under their own name as a sole trader or start a limited company.

All figures below are for the 2005/6 tax year.

[edit] Stamp Duty

This is a tax on the buying of all shares and property.

The main features are:

  • Charged at 0.5% of the total purchase cost
  • Doesn't apply when you sell
  • No stamp duty payable on spread betting or CFDs because you never actually own the actual shares

[edit] Capital Gains Tax (CGT)

Capital gains arise when you dispose of assets at a profit.

Personal allowance: £10,100 (for individuals, personal representatives and trustees for disabled people. For other trustees only the first £5050 is exempt see http://www.hmrc.gov.uk/rates/cgt.htm for details)

This is the amount of tax-free profit an individual can accrue.

Above this figure, profits are taxed as if they were your top slice of income. If you have no other income then you will pay: 18%

23 June 2010 onwards - For gains made from this date the following Capital Gains Tax rates apply:

  • 18 per cent and 28 per cent tax rates for individuals (the tax rate used depends on the total amount of taxable income)
  • 28 per cent for trustees or for personal representatives of someone who has died
  • 10 per cent for gains qualifying for Entrepreneurs' Relief

The 10 per cent rate for Entrepreneurs' Relief replaces the previous method of giving Entrepreneurs' Relief (see above). The relief is subject to an increased maximum lifetime limit of £5 million.

Working out your taxable income and the Capital Gains Tax rate to use

For gains made on or after 23 June 2010, individuals need to work out their total taxable income before working out which Capital Gains Tax rate to use.

    Trading losses can be offset against profits and if necessary carried forward to offset against profits in future tax years. Expenses, except broker commissions, cannot be claimed against profits.

    [edit] Income Tax

    Paid by self-employed sole traders.

    Personal allowance is generally £6,475.00 for those under 65 (for exeptions please see http://www.hmrc.gov.uk/rates/it.htm)

    This is the amount of tax-free income (i.e profit) an individual can accrue.

    Profits above this level are taxed like this:

    <tbody> </tbody>
    Income Tax rates and taxable bands
      2008-09 2009-10 2010-11
    Start rate for savings:10%* £0-£2,320 £0-£2,440 £0-£2,440
    Basic rate: 20% £0-£34,800 £0-£37,400 £0-£37,400
    Higher rate: 40% Over £34,800 Over £37,400 £37,401-£150,000
    Additional rate: 50% Not applicable Not applicable Over £150,000


    Expenses incurred wholly in the course of trading can be deducted from income.
    Examples of expenses might include:

    • Broker commissions
    • Data feed
    • Software
    • Internet connection
    • Office rental (if trading away from home)

    Trading losses can be offset against profits and if necessary carried forward to offset against profits in future tax years and indeed, in some cases, past years.

    [edit] National Insurance

    Self-employed sole traders will also have to pay National Insurance.

    • Class 2 contributions are paid at a flat rate of £2.40 per week (provided profits are above £4345 per annum. If they are not you can apply for a low earnings exemption certificate.)
    • Class 4 contributions are paid at a rate of 8% of profits between £5,715 and £43,875, and 1% on profits above £43,875.

    NI contributions are calculated on profits net of income tax.

    Full details can be found at http://www.hmrc.gov.uk/rates/nic.htm

    [edit] Corporation Tax

    Paid by limited companies set up by self-employed individuals in order to trade.

    [edit] Corporation Tax rates

    Rates for financial years starting on 6 April

     

    2008

    2009

    2010

    2011 

    Small Profits Rate < 300,000*

    21%*

    21%*

    21%*

    20%

    Marginal Relief Lower Limit

    £300,000

    £300,000

    £300,000

     

    Marginal Relief Upper Limit

    £1,500,000

    £1,500,000

    £1,500,000

     

    Main rate of Corporation Tax

    28%*

    28%*

    28%*

    27%*

    Special rate for unit trusts and open-ended investment companies

    20%

    20%

    20%

     

    Full details can be found at http://www.hmrc.gov.uk/rates/corp.htm

    Individuals will also be liable to personal tax and NI as per the income schedule and the company will pay a contribution toward National Insurance There are ways of reducing this, e.g by only paying yourself a salary equal to the personal allowance and taking the rest of your "pay" as dividends.

    If the company is used solely as an investment vehicle (i.e. no other business) then the following needs consideration;

    This will be construed as an investment company and subject to 30% corporation tax on all profits irrespective of the size of the profits. There are also VAT drawbacks on using the company as a pure investment company as the company will be subject to partial recovery rules. This will impact VAT recovery on software, data feeds, computer equipment etc. Only a very small proportion of the VAT incurred can be recovered.

    This structure also does not make efficient dividend payments as additional dividends will be subject to a higher rate of tax. The total tax payable on your gains will be higher than if you decide to go and do this outside the wrapper of a limited liability company.

    Seek proper tax advice before you decide on what to do.

    [edit] Sole trader or limited company?

    Up until recently small businesses were able to make annual tax savings of up to £4000 by operating as a company rather than a sole trader.

    Up to April 2004 you could pay less tax as a company because (since Apr 2002) small companies paid no corporation tax on the first £10000 of profits. Profits between £50,001 and £300,000 were taxed at 19% and a system of marginal tax relief smoothed the transition between the 0% and 19% levels for companies with profits between £10,001 and £50,000. As a director/shareholder of your own company you were able to reduce your income tax bill and avoid National Insurance altogether by paying yourself a salary limited to the personal allowance. You then paid yourself the rest of the money in dividends. This was a pleasant situation to be in!

    But, from April 2004, in an attempt to level the field between directors of small companies and the sole traders, any money paid out to an individual as dividends is now taxed at a minimum average corporation tax rate of 19%. The change has only affected companies with profits of less than £50,000 - those with larger profits have always paid tax at an average rate of 19% anyway. If you have a smaller company and want to pay yourself a dividend, but pay an average rate of less than 19%, you now have to find money to pay extra corporation tax to the Revenue, thus cutting the amount of the dividend.

    Business with the least profits have to pay the most extra in corporation tax, but even so, they still pay less tax overall than they would as sole traders.

    However against the tax saving advantages of incorporating, people who are thinking of operating as a company need to consider the drawbacks, which include:

    • More formal and costly accounting and reporting requirements.
    • More formal procedures for drawing money from the business
    • Tougher rules for expenses and fringe benefits

    The taxation of corporations set up by individuals is a complex subject and profession advice should be sought or in depth research carried out before deciding on a course of action. This article merely outlines the basics and should not be taken as advice in any form.

    [edit] T2W links

    Forum


    [edit] External links

    Tax rates 2005/6
    Inland Revenue

    More information on limited companies