Being an aspiring commercial lawyer often means being confronted by complex, often abstract, concepts. This can result in a wall of jargon, which students and trainees often find difficult to understand. We’ve therefore introduced LegalLingo to break down these concepts into bite-size explanations to make the industry more accessible for aspiring trainees.
Latest up in the series is an explanation of what withholding tax or 'WHT' means.
WHT refers broadly to tax which the person making a payment has to deduct from that payment and account for to the tax authorities. The UK makes some payers withhold tax on certain types of payment including, amongst other things, certain salary and interest payments.
Instead of requiring the recipient to pay all the applicable tax following receipt of the full amount, a portion of the payment is withheld and paid directly to HMRC by the payer and the recipient gets a 'credit' for that in their tax return. Withholding tax can therefore be considered a collection mechanic.
For example, if income tax were charged at 20% on a £100 salary payment, the employer would instead pay the employee £80, and hand £20 directly to HMRC. The employee should then not have to pay the same tax again in their annual tax return.
Withholding tax benefits tax authorities in several ways, for example:
- It often means the tax accounting and payment is done by the party better equipped to do so – for example, employer payroll departments rather than individual employees.
- It provides a tool against tax evasion / non-compliance. Where payments are made 'gross' i.e. including the tax amount of a payment, they can become more difficult to tax, particularly where a payee is located overseas. Taxing at the source can mean catching the payment while it is still in the tax authority’s control.
- It can offer a cash flow advantage. Rather than waiting for the end of the period when the recipient completes their tax returns, the tax authorities are paid the tax earlier by the recipient.
If you found this helpful, why not check out the other LegalLingo posts on our website? We’ll be adding to it regularly so keep an eye out for them.
Legal Lingo seeks to break down legal buzzwords, concepts and jargon into bite-size explanations to make the industry more accessible for aspiring trainees. Read the full directory below.