Taxation in the UK

Taxation in the UK

The purpose of this Learn-It is to give you an idea of where the government's annual tax receipts come from. If you want to see the government's 'books' in much more detail, go to the Treasury's website. The pie chart below gives you an idea of where the government's tax revenue comes from.

Taxation

Note that all figures have been rounded to the nearest billion (!) and the percentages all represent the proportion of the total tax receipts of the government (£377 billion). The figures are Gordon Brown's estimate of the various tax receipts for the tax year April 2000 to April 2001, as announced in the Budget of March 2000. The figures were adapted from the Financial Times of the 22nd March 2000.

The pie chart has been split into four. The black segment represents Inland Revenue taxes. The blue segment represents Customs and Excise taxes. The red area represents other 'big' taxes. The green area is everything else.

Income tax

This is the biggest single tax in terms of revenue for the government. It represents just over a quarter of all government revenue. At this stage, it is probably worth looking at exactly how this tax is levied.

Everyone has a personal allowance. One can earn £4,385 (all figures refer to the tax year 2000-01) without paying any income tax. The Chancellor tends to raise this at each Budget by the rate of inflation, but as prices do not rise as quickly as average earnings, more of one's income, relatively, gets taxed every year. After the Second World War, the personal allowance (in today's money) was around £15,000! Most people paid no income tax! There are other additional allowances for married couples and pensioners (helping families and the old).

Once you start earning more than £4,385 income tax becomes payable. There are three tax rates. The starting rate is now only 10% (it was 20% until recently). You pay 10% tax on the first £1,520 of taxable income. That is, on all income up to £5,905. On the next £26,880 of taxable income, you pay the basic rate of tax, which is currently 22% (down from 23% last year). So you give the government 22% of all gross income between £5,905 and £32,785. If you are lucky enough to be earning over £32,785 then you will pay the top rate (40%) on any income earned over that level.

Corporation tax

Income tax is for individuals' income. Corporation tax is for companies' income, or profits. Big companies pay at the rate of 30%, medium size companies pay 20% and small companies pay only 10%.

Others

This includes Stamp duties (the tax on buying a house); Capital gains tax (tax on capital gains through the sale of shares, for example); Inheritance tax (on any money/assets left worth over £234,000) and Petroleum revenue tax (a tax on the output of North sea Oil - this used to be very significant).

Value Added Tax (VAT)

This was the third biggest form of revenue for the government in 2013. This is a tax on expenditure. Most goods and services are taxed at the rate of 20%. Some essential goods, such as basic foodstuffs, children's clothing and books, are zero rated, meaning they are exempt from VAT. Domestic fuel, which used to be zero rated, is now taxed at 5%.

Fuel duties

This is very much in the news now that petrol costs more in the UK than anywhere in Europe. The last Conservative government introduced the 'fuel escalator'. This meant that the price of petrol would rise (through increased excise duties) by the rate of inflation plus 5%. The Labour government increased this to 6%, but once the price of fuel rose above virtually every country in the world, they cancelled the escalator. Duties now tend to rise at the rate of inflation. Why raise petrol duties so much? Petrol pollutes the environment. The government claimed that the increased price of petrol should put people off driving and encourage them to use the more environmentally friendly forms of public transport. Of course, they know that the demand for petrol is extremely inelastic, so a cynic might say that raising fuel duties is a good way of raising revenue for the government.

Tobacco and alcohol duties

The title speaks for itself. It should be noted, though, that duties on tobacco, alcohol and fuel are levied on each unit, and not as a percentage of the price like VAT. In 2000, the price of petrol rose partly due to the increase in the price of oil. The actual duty paid did not change once it was set in the Budget.

Others

These include Betting tax, Air passenger duty and Insurance premium tax.

National Insurance Contributions (NICs)

These are often referred to as Social Security contributions, because they are meant to go towards paying for social security. Of course, as with all taxes, they just go into the big pot and distributed as the government sees fit. The 'national insurance' idea was that these taxes were paid from individuals? income to cover themselves in times of need. Whether you lose your job (unemployment benefit), or get sick (the NHS) or get old (state pensions) this payment made throughout your working life would cover it. Nowadays, the NICs do not get close to covering these huge government expenditures, but the money received does go towards it. Although it is strictly not an income tax, the payments are based on weekly income. Workers pay 10% of any weekly earnings between £76 and £535. Notice that one doesn't pay NICs on income over £535 a week (the equivalent of just under £28,000 a year). This means that you pay the same total NICs whether you earn, say, £30,000 a year or £100,000 a year (a regressive tax at the top end).

Business rates

This is a local government tax paid by individuals. In particular, the tax is levied on the occupant of a given property.

Council tax

This is a local government tax paid by individuals. In particular, the tax is levied on the occupant of a given property. The amount paid is based on the value of the property as of April 1992 (when the tax started). All properties were placed in a 'band' based on their value. The tax paid by the occupant (whether they owned the property or were just renting) then depends on the 'band' in which the property lies. Expensive houses in the top 'band' attracted higher annual council taxes; cheap flats in the lowest 'band' attracted a lower annual council tax.

This is the green segment. There are lots of obscure taxes that you don't need to know about. One example is the tax on interest earned on savings and dividends earned on shares.

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