Taxation in the UK

We have been asked to produce a summary of the most frequently asked question regarding tax system and rates on companies and employee benefits in the UK.

The information set out below can only be a brief description of the issues and does not take into account individual circumstances. Please consult your usual professional adviser before taking any action that is based on this information.

Company tax rates

a) Taxes on profits

The company tax rate which will apply to most limited companies in the UK is 21%. This is called the Small Companies Rate, which applies to those companies with a net profit of GBP 300,000 or less. If there is a group, the GBP 300,000 is divided equally amongst the companies, so in a group with three companies the 21% Small Companies Rate would apply to the first GBP 100,000 of net profit in each company.

The Full Rate of company tax is 28%, which applies fully when the profits are above GBP 1.5 million. The rate between the Small Companies and Full rates is 29.75%

b) Payroll taxes (Social costs)

The payroll tax rate is 12.8% of the salary for each person above GBP 5,720 per year. There are no social costs to pay below this amount.

Personal tax rates

Personal taxes are divided into two categories, income tax and social costs.

Income tax

The tax free allowance this year is GBP 6,475 per year. The income tax rate for the next GBP 37,400, that is up to total earnings of GBP 43,875 per year, is 20%. The rate on all income above this is 40%, without any top limit although there are plans to introduce a top rate of 50% on very high incomes next year.

Social costs

The employee must also pay social costs. Just the same as the company payment, the first GBP 5,720 is free. Above this the employee pays 11% up to an income of GBP 43,888 per year, and 1% on any income above that.

Company cars

We are often asked for information on the tax position of company cars in the UK. I will try to summarise the situation and the various possibilities for you below.

a) Employees using their own car for the business of the company.

This is becoming more common employees sometime prefer the ability to chose their own cars and to not pay the “benefit in kind“ tax for having a company car.

There is a tax free allowance payable for using their own car, and for the tax year ending 5th April 2010 this is GBP 0.40 for the first 10,000 English miles of business use, and GBP 0.25 for every English mile over 10,000. Detailed records must be kept and the payments approved in the same way as other expenses.

There is no tax or social costs payable on this allowance.

Sometimes the company will decide also to make a monthly fixed payment towards the cost of the employees using their own car, and this amount is taxable and social costs are payable. If the company decides to make a fixed monthly payment they also may reduce the amount paid per mile, and if this occurs then the employee can claim the difference between the amount actually paid and the tax free allowance rate against their own taxes.

b) Company Car

Where an employee has the use of a car provided by the company they must pay the tax to have this available for private use. This charge does not include the fuel, which is separate.

The charge for private use take the form of a calculated amount of money which is added to the employee’s income for tax purposes. Income tax on this amount is then paid at the rate which applies to the individual employee. Social costs are also payable on this amount.

The amount of money added to his income is a % of the list price of the car when it was new. The % is calculated according to the CO2 emissions of the car, and is between a minimum of 15% and a maximum of 35%

c) Fuel for private use

The company may allow the employee the benefit of fuel for private use. If it does this then the employee must pay tax calculated in the same way as above on an amount which changes each year. For the tax year 2009/10, the same % as used for the tax charge for the use of the car is applied to an amount of GBP 16,900, so if the calculated % is say 25%, then the amount of the additional income calculated for the private fuel is 25% of GBP 16,900.

If the company does not allow private fuel, then of course the situation is different. In this case the company can either pay for all the fuel which goes into the car, and make the employee pay back the fuel for all non business use, or it can make the employee pay for all the fuel personally, and then pay the employee for the fuel used on business travel. In both cases there is a fixed amount and a process which must be strictly followed.

For the first situation let us say that the company pays for all the fuel and the employee must pay back for the private usage. The employee must report the mileage covered by the car at the beginning and end of the period for which the claim is made, and must also record every business related journey, showing the date, place visited, purpose of the journey and the distance covered. The total of the business miles is deducted from the total miles the car has gone in the period, and the difference is all taken as private use. The employee must pay back to the company the private use at a fixed rate per mile This is usually achieved by deducting the amount shown below from the expenses claimed.

The rates used at the moment are:

Petrol engines of 1400cc or less 10 pence per mile

Petrol engines 1401cc to 2000cc 12 pence per mile

Petrol engines over 2000cc 18 pence per mile

Diesel engines of 2000cc or less 10 pence per mile

Diesel engines over 2000cc 13 pence per mile

If the employee pays for all the fuel which goes into the car personally, he can claim for business mileage at the same rates per mile as above. The records which must be kept are the same.

If these rates are used and the correct procedure is followed then there is tax to pay and no social costs on the company. If not, then the tax authorities may claim that there has been private fuel provided and will tax the employee and the company as above.

Please note that, if the company pays less than these rates per mile for fuel the employee cannot claim the “shortfall“ against their taxes.

All of this may seem complicated, as the system was invented by officials who have never worked in a real company so of course it is complicated. However, at EBS we have a process to make it easier.

The situation is really quite easy. Follow the rules and you will be OK, do not follow them and you will pay a lot of money.

As with all tax considerations it is not possible to cover all possibilities in a newsletter like this. It is therefore important that you seek advice from your usual professional adviser before taking any decisions or actions.