Taxes play an important role in determining the funding of public services, infrastructure, and social programs in any country. Managing financial responsibilities effectively requires an understanding of taxation for both individuals and businesses. The United Kingdom’s tax system consists of two main types of taxes like corporation tax and income tax.
It is important to differentiate between these two separate tax groups as people and businesses navigate the UK tax system. While income tax and corporation tax may appear to be the same at first glance, they are used for different purposes and have different purposes for different types of industries. In this blog, you can explore the detailed difference between corporation tax vs income tax.
WHAT IS CORPORATION TAX UK?
Corporation tax is a direct tax assessed on the profits of companies and corporations in the United Kingdom. As a source of revenue for the government, it contributes a great deal to funding public services. Taxes are calculated based on the taxable profits of a company, which includes its total income from various sources, less deductions and expenses allowed.
The amount of profits a company makes can impact the corporate tax rates that are paid. Businesses are required to file a corporation tax return after the end of their accounting period. A tax return calculates the company’s tax burden, which is subsequently paid to Her Majesty’s Revenue and Customs (HMRC).
There are various tax incentives and allowances that are available to encourage specific business activities and investments. Companies often seek professional advice to ensure accurate compliance with UK corporation tax regulations due to their complexity.
WHAT IS INCOME TAX IN THE UK?
Income tax is an essential part of the taxation system in the UK, which depends on people’s earnings and income. It supports multiple public services and programs while functioning as the government’s main revenue source. Taxes are calculated based on an individual’s annual income, which includes wages, salaries, pensions, rental income, and other sources of income.
There are different income bands in the UK, each with its own tax rate, and individuals are taxed accordingly. Taxes are deducted from total income in the form of a personal allowance. Tax rates differ with income levels, with higher earners paying a greater percentage of their income in taxes than those earning below this allowance. The self-employed must also pay National Insurance contributions to qualify for entitlements such as healthcare and pensions. Income tax assessment and payment require proper record-keeping and adherence to tax deadlines. Tax professionals can assist individuals in complying with tax regulations while maximizing available allowances and deductions.
DIFFERENCE BETWEEN CORPORATE TAX AND INCOME TAX.
In the United Kingdom, corporate tax and income tax target different entities and sources of revenue. The following are the key differences between the corporate tax and income tax.
| No. | Topics | Corporate Tax | Income Tax |
| 1 | Taxpayer Type | This tax is applicable to companies and corporations operating within the UK. | This is applicable to the resident of the United Kingdom. |
| 2 | Based on | Corporate tax is based on the profits generated by these businesses from their various activities. | Income tax is based on personal income like salaries, pensions, rental income, and other sources of personal income. |
| 3 | Taxable Entity | Limited companies and foreign companies with a UK presence have to pay corporate tax. | Individuals, whether employed or self-employed has to pay income tax on their personal earnings. |
| 4 | Calculation Basis | Taxable profits of a company are determined by subtracting allowable expenses and deductions from total income.
The resulting profits are then taxed at the applicable rates. |
Personal income is categorized into different bands for the calculation of income tax. A personal allowance is deducted from the total income before tax is calculated. |
| 5 | Tax Rates | Corporate tax rates can vary based on the level of company profits. | Income tax rates are progressive. It is an increase in an individual’s income rises. |
| 6 | Rate calculation | There are standard rates for lower profits and higher rates for profits exceeding a certain threshold. | Different income bands have different tax rates. |
| 7 | Reporting | Companies are required to file a corporation tax return within a specified period after their accounting period ends. | Individuals generally have their income tax deducted at source through the PAYE (Pay As You Earn) system if they are employed. |
| 8 | Scope of Application | It is applicable on profits generated by companies from their business activities, investments, and other sources. | It is applicable on personal earnings, including salaries, wages, pensions, rental income, and other types of personal income. |
Conclusion
Now it is important to note that even though both income tax and corporate tax contribute to the UK’s revenue, they are tailored to differing types of entities and income sources Profits earned by companies are subject to corporate tax, while earnings earned by individuals are subject to income tax. Both Businesses and individuals need to understand these distinctions for accurate tax compliance and effective financial planning.