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III The tax systemThe following is intended to provide asummary of some of the features of the UK taxsystem that are relevant to an overseasbusiness wishing to establish a UK presenceor an overseas individual wishing to work inthe UK. However, the UK tax system is acomplex one and further advice should beobtained.1. Personal taxes1. Income TaxIncome tax rates currently start at 10% (butonly for those on low incomes). Subject to thatthere is a basic rate band of 20% and a higherrate of 40% (currently 32.5% for dividendincome reduced to an effective rate of 25% ifthe non-repayable tax credit is taken intoaccount). From 6th April 2010 there has beena top rate of 50% for those with taxableincome over £150,000 per year (42.5% fordividend income, reduced by the nonrepayabletax credit to an effective rate of36.1%).From 6 April 2013 the top rate of income tax isdue to go down to 45% (37.5% for dividendincome, reduced by the non-repayable taxcredit to an effective rate of 30.6%). Whereindividuals receive income through theiremployment, their employer will be obliged tooperate PAYE (see page 11). They will also besubject to National Insurance Contributions(NICs). The rate of employees’ NICs willnormally be 12% for salaries between £7,605and £40,040 per year and 2% on any excessover £40,040.A tax-free personal allowance is deducted froman individual’s total taxable income. Thatallowance is currently £8,105 for the tax year2012-2013. There is a tapering of the personalallowance for those earning over £100,000 peryear. From 6 April 2013 the basic personalallowance for those aged under 65 will beincreased from £8,105 to £9,205 .A shareholder who is an individual resident fortax purposes in the UK and who receives adividend will be entitled to a (non-repayable)tax credit equal (at current rates) to one ninthof the dividend (hence reducing the effectiverate of income tax to 25% - for higher ratetaxpayers – or 36.1% for top rate taxpayers).Overseas shareholders in a UK company donot usually have any further tax to pay on UKdividends.2. Capital Gains Tax (CGT)CGT is a tax chargeable on the disposal ofassets. All gains (including held over gains) onthe value of assets realised upon disposal aresubject to CGT at 18% or 28%. For companiesgains are added to total income and aresubject to Corporation Tax. In the tax year2012-13, the first £10,600 of gain realised byan individual is exempt from CGT. Companiesalso pay tax on their capital gains, but the taxin question will be corporation tax (see furtherbelow). Companies are not entitled to theannual allowance of £10,600.Entrepreneurs’ relief reduces the rate of CGTto 10% for the first £10 million worth of gainsupon the disposal of certain qualifying assets.The £10m limit applies to gains realised duringthe lifetime of an individual and once expendedduring a lifetime, cannot be used again (thislimit increased from £1m to £2m for disposalsafter 5th April 2010,from £2m to £5m for post22 June 2010 disposals and from £5m to £10mfor post-6 April 2011 gains). Various conditionsmust be met to secure entrepreneurs’ relief.For example, in relation to the shares of atrading company, throughout the 12 monthsprior to the disposal the vendor must havebeen holding at least 5% of the share capital ofthe company whose stock are being sold andhave been an officer or employee of thecompany.2. Taxation of companies1. Corporation TaxWho is chargeable?UK companies are liable to corporation tax ontheir worldwide profits, i.e. broadly income andchargeable gains (less expenses). Non-UKresident companies carrying on a trade in theUK through a “permanent establishment” in theUK are liable to corporation tax on profitsattributable to the UK permanentestablishment. The profits of the UKpermanent establishment may also be taxed inthe country in which the overseas “parent” isresident. In such a case, credit is normallygiven in the overseas country for the tax leviedin the UK (please see the section marked“Double Taxation Treaties”).PAGE 10