The following is a guest post by Justin Smith
Like most countries, traders in the United Kingdom pays various forms of taxes. However, there is a difference in how companies engaged in trade face a different tax as compared to a sole trader. When it comes to tax on profits, sole traders are required to pay class two and four National Insurance and income tax on their taxable business profits. Those in partnerships should pay the same for their share of the benefits. Companies, on the other hand, are required to pay corporation tax on their taxable profits. The companies then subject their employees to paying NICS and PAYE as a way of covering some of the charges incurred. Shareholders of the enterprise pay taxes for their dividends.
When extracting profits, sole traders can withdraw money from their respective businesses without any charges. Companies are engaging in trade, on the other hand, for any income removed from the enterprise in the UK faces taxation. Company’s face taxing the form of dividends if the business they engage in is distribution. The benefits that such companies offer to employees or their families meets some tax in the UK. When it comes to borrowing, sole traders can borrow cash from the business’s bank account. However, if the money acquired leads the bank into running into overdraft, you will have restricted interests and a tax relief on the bank charges. In the case of trading companies, directors can borrow loans whereby a 25% tax goes to the company if the loan Is unpaid within a period of nine months of the company’s year-end. The tax is set to rise to 32.5% for loans borrowed on or after April 5, 2016.Directors can face taxation for the beneficial loan interest if the loan issued was interest-free.
While trading has its benefits, there are other options for trading especially for people working in their spare time or while travelling. An example is online trading where an individual can trade in different commodities such as currencies, shares and bonds to mention a few. With the advancement of technology, people buying online get to do so at their comfort with the need for a traditional broker. Companies offer such services like CMC Markets traders who serve a wide variety of clients. Compared to some countries, the tax laws governing Forex trading in the United Kingdom are rather friendly. Trading services such as spread betting profits do not get any form of taxation. Brokers in the UK also offer their clients forex demos and regular accounts that fit the structure of spread betting. Because of such services, clients get to trade in the forex market without having to pay taxes thus making online trading tax-free.
While trading in forex may be free, one must consider other factors that, if experienced personal reasons, they should pay tax for the transaction. However, if purchasing of currencies is not for personal use, the individual will not pay tax gains for any capital gains on the foreign currency bought. If, for example, the person transferred a certain amount of cash into a euro account and then the value of the euro strengthened as compared against the value of the pound.The money is then transferred back into the form of sterling; there would be a currency gain which would result to the individual paying the CGT tax.
To avoid such a situation, the individual would be better of engaging in spread betting which is tax-free in the United Kingdom. Other than spread betting are free of taxation, there is a side where any losses incurred are not tax deductible as well. While both traditional trading and online trading have their advantages and disadvantages, online trading has more benefits especially when taxation is concerned. Other than having the luxury of trading at the client’s comfort and preference, most of the online trading services in the UK do not meet any, and the trader enjoys trading tax-free. Other than being free of taxation, clients engaging in online trading are not limited by geographical boundaries or by working hours. Since the trade takes place on the internet, customers can trade freely across the globe with no time restrictions because online trading is 24 hours in a day with some like forex trading having the exception of working five days in a week. Clients, therefore, get unlimited access to the market and can have more time to engage in trade.