direct taxation in the UK
Income tax is a direct tax on all incomes received by private individuals after certain allowances are made. A direct tax is a tax whose burden cannot be shifted onto someone else. This is in contrast to an indirect tax. Everyone has a non-taxable allowance.
- Personal allowance: £4,385 p.a.
- Lower rate 10%
- Basic rate 22%
- Higher rate 40%
Income tax is a progressive tax. This means that as income rises the proportion or percentage of income paid in taxation rises. In the UK the lowest rate of income tax is 10 per cent, the basic rate is 22% and the highest is 40 per cent.
Because the marginal rate of tax rises at certain levels of taxable income, the average rate of tax paid also rises with income. Highly paid sports stars will pay most of their earned income @40%. People in relatively low-paid jobs will pay at most the basic rate of tax. Indeed their gross income may at a level low enough for them to avoid income tax altogether.
The marginal rate is zero for the annual tax free allowance. For the next band of income, tax is paid at 10%. A basic rate of 22% is applied over the next range of taxable income (gross income - tax allowance) before the top rate of tax kicks in. Extra income earned beyond this is taxed at 40%.
When Labour was elected into power in May 1997, it committed itself to not increases in the basic and higher rates of income tax during the lifetime of the current Parliament.
The extent to which our income tax system is progressive is shown in the chart below. As taxable income increases, the percentage of income taken in tax also rises. In this way the income tax system makes a contribution to reducing the scale of income inequality within the economy.
Over the years the basic rate of income tax has come down. In 1978 it was 33%. It fell to 30% in 1979 and 25% in 1988. The higher rate of income tax has declined sharply - from 83% in 1978, to 60% in 1987 to 40% in 1988. It has stayed at this level ever since.
The latest edition of Social Trends shows that in 1998-99, 3.2 million individuals had taxable incomes in excess of £30,000. And nearly a quarter of a million enjoyed a taxable income greater than £100,000. The chart opposite tracks the average rate of tax paid by various income groups last year.
Because the marginal rate of tax jumps as income rises, we have a progressive income tax system where the average tax rate rises with income. Individuals with an income of £15,000 - £20,000 contribute 14% in income tax (the chart excludes national insurance contributions). People at the top of the earnings scale with a taxable income greater than £100,000 a year pay 33% in income tax.
Last year 200,000 top earners contributed £15.3 billion in income tax to the Government. People earning £50,000 or more made a total payment of £27.8 billion to the Exchequer. The number of people falling into the top rates of tax has grown over time - in part because of rising national wealth. Earnings rise faster than prices and taxpayers find themselves moving into the higher tax brackets. This process is known as fiscal drag.
A 40% top marginal rate of tax is not necessarily a major disincentive to earn extra income. The Labour Party made a commitment at the last election not to raise the top rate of income tax - having lost the 1992 election in part because they wanted to increase the top rate to 50%.
A new study from economists at the OECD paints the UK as a relatively low tax economy. The chart opposite shows the total payment made in income tax plus employee social security contributions as a % of gross wages in 1998.
Direct taxes in Britain are significantly lower than in Germany. In Portugal and Greece income and payroll taxes are extremely lowmost of the tax revenues for these countries comes from spending taxes. And employer payroll taxes are much higher as well.
Britains relatively low personal and corporation tax rates is one of the factors behind the favoured venue status of the UK for inflows of foreign direct investment over recent years. Lower taxes on company profits increase the incentives for multinationals to assign their capital spending in the UK and create jobs in the process.
NATIONAL INSURANCE CONTRIBUTIONS
A direct proportional tax (currently 10% for employees) taken off the earnings of those people in employment. Employers also pay contributions for each worker they employ
Tax on the profits of companies - a proportional tax levied at 30% per cent for larger companies (20% for 'smaller' firms)
PETROLEUM REVENUE TAX
This tax is levied on the income from exploiting North Sea oil and gas. Paid in addition to corporation tax.
Inheritance Tax is levied on the value of wealth transferred from one person to another either at death or during a lifetime.
CAPITAL GAINS TAX
Capital Gains tax is a tax on the increase in value of certain assets when they are sold compared with their value when they were bought. For example, any increase in the value of shares at the time of sale is subject to capital gains tax
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