‘Academic’ Intelligence: A (Very) Brief Overview of Taxation, Part One

Link to podcast to follow

Several weeks ago, a couple of international friends of mine asked what taxes we paid in the UK.

They, indeed, quite intrigued to find out more about the various types of taxes and how those are

applied to various individuals and business.

I have, thus, decided to briefly outline the main taxes that an individual pays in the UK.

Prior to going on any further, I should like to note that I am by no means trying to insult the intelligence of my UK audience; rather, I am merely trying to provide my international readers that they might find quite useful.

Value Added Tax (‘VAT’)

At present, most of the items that you buy in the UK are, in reality, supposed to be 20% cheaper than they are sold at. What inflates the price is the VAT added on top. VAT avoids the cascade effect of sales tax by taxing only the value added at each stage of production.

Income Tax (‘IT’)

Any income that you generate through being employed on an employment contract will be taxed with IT. 

Since your paycheque goes through a system called PAYE, you cannot choose what rate of IT you will be paying; it is automatically applied, based on how much you are earning.

The various bands are as follows:

Your earning [per year after taking away your Personal Allowance amount from your earning]	Tax rate 2013 - 2014	that is
Under your personal allowance amount	No tax is taken	£0
£0 - £32,010▼	20%	called basic rate
£32,011▼ - £150,000	40%	called higher rate
over £150,000	45%▼	called additional rate

( See << http://iknowtax.com/2013/ >>

The ‘personal allowance amount’ (‘PAA’) is currently £ 9, 440 if you were born on or before 6^th April 1948 and you are earning less than £ 100, 000 per year. If you are earning more than £ 100, 000, the PAA is decreased 50% of every pound you earn above £ 100, 000 until it reaches £ 0 (i.e. at £ 118, 000).

National Insurance Contribution (‘NIC’)

If you are employed through a contract, the NIC is automatically deducted from your paycheque via the PAYE system.

This is how NIC is applied:

Your earning [per year]	National Insurance rate	that is
Earnings up to  £7748▲	0%	No National Insurance contribution is payable
Earnings between £7748▲ and£41,444▼	12%	Salary minus £7748 = X, 12% of X
Earnings £41,444▼ or more	2%	£41,444 minus £7748 =  £33,696, 12% of £33,696 plus salary minus £41,444 = X, 2% of X

(See << http://iknowtax.com/2013/ >>)

If you are self- employed, different rules apply. Self- employed individuals have to either pay Class 2 NIC ( << http://www.hmrc.gov.uk/working/intro/class2.htm >>) or Class 4 NIC (<<http://www.hmrc.gov.uk/working/intro/class4.htm >>)

As an example, if you are earning £ 20, 000 per year, you will be paying £ 2, 112. 00 in IT and £ 1, 470. 24 in NIC, leaving you with a net salary of £ 16, 417.76.

(Should you want to calculate how much tax you would pay in the UK, please visit << http://iknowtax.com/2013/ >> and use the tax calculator at the top.)

Next week, I shall opt to provide a brief overview of Capital Gains Tax, Inheritance Tax as well as Corporation tax.