Main types of tax in the UK
- Income tax – This a tax on people’s income. The basic rate of income tax is 20%, paid on income over the income tax threshold of £10,400.
- National insurance contributions. Another type of income tax is national insurance contributions, which are based on a similar principle of taking a certain percentage of income.
- Consumption tax – VAT – 17.5%
- Excise duties on alcohol, tobacco
- Corporation tax – tax on company profit
- Stamp duty – tax on buying houses/shares
Income tax rates in the UK
|Basic rate 20%||£0 to £31,865|
Most people start paying basic rate tax on income over £10,000
|Higher rate 40%||£31,866 to £150,000|
Most people start paying higher rate tax on income over £41,865
|Additional rate 45%||Over £150,000|
Main types of tax
from ONS. It is not a particularly helpful subdivision of taxes.
How much is income tax?
Example, if your income is £40,000 of taxable income
- You pay 0% on your Personal Allowance of £10,000.
- You pay 20% on the income from £10,000 to £31,866 (21,866) = £4,372.20
- You pay 40% on income between £31,866 to £40,000 – £8,134 = £3,253
- Total tax – £7,625
- average tax rate 19%
This is a tax that when income rises people pay a higher % of their income in tax e.g. top rate of income tax is 40%. This is paid on earnings over £40,000 a year. (See: progressive tax)
This occurs when an increase in income leads to a smaller % of their income going on the tax. E.G excise duties. A regressive tax means those on low incomes pay a higher % of tax. (See: regressive tax)
This occurs when an increase in income leads to the same % increase in tax.
Types of equity
- Horizontal equity: The equal treatment of people in the same situation
- Vertical equity: The redistribution from the better off to the worse off in the case of taxes this means the rich paying proportionately more taxes than the poor
The requirements of a good tax system
- Horizontal equity. People in the same circumstances should pay the same taxes, e.g. you shouldn’t be able to avoid paying income tax because of a particular situation.
- Vertical equity. A degree of proportionality is important, e.g. progressive taxes.
- Cheap to collect
- Difficult to evade
- Efficient, non-distortion e.g. if taxes are too high people may be put off working
- Easy to understand
Reasons for tax
- Raise revenue for government spending.
- To promote redistribution of income and wealth.
- Discourage consumption/production of goods with negative externalities or demerit goods
Negative income tax
This is a progressive system of tax and benefits designed to reduce relative poverty. Those on low incomes are a given benefits, as income increases, the benefit decreases. After a certain level of income, people will start paying tax.
Examples of tax
- Carbon tax – environment tax on CO2 pollution