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UK Tax System-An Intro

This document provides an overview of the UK tax system, including: 1) It discusses how taxation impacts the economy and is used to influence economic factors and behaviors. Taxes may encourage saving and charity or discourage behaviors like smoking. 2) It explains how the taxation system aims for social justice by accumulating and redistributing wealth. Different types of taxes like income tax can be progressive, regressive, or proportional. 3) It outlines the main types of direct and indirect taxes in the UK, including income tax, national insurance, capital gains tax, inheritance tax, corporation tax, and VAT. It also distinguishes between tax avoidance and tax evasion.

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Sunitha Ram
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61 views8 pages

UK Tax System-An Intro

This document provides an overview of the UK tax system, including: 1) It discusses how taxation impacts the economy and is used to influence economic factors and behaviors. Taxes may encourage saving and charity or discourage behaviors like smoking. 2) It explains how the taxation system aims for social justice by accumulating and redistributing wealth. Different types of taxes like income tax can be progressive, regressive, or proportional. 3) It outlines the main types of direct and indirect taxes in the UK, including income tax, national insurance, capital gains tax, inheritance tax, corporation tax, and VAT. It also distinguishes between tax avoidance and tax evasion.

Uploaded by

Sunitha Ram
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Module 1

The UK Tax System


Function and purpose of taxation in a
modern society
1)Economic factors
• Spending by the government and the system of taxation impacts on
the economy of a country.
• Taxation policies have been used to influence economic factors such
as employment levels, inflation and imports/exports
• Taxation policies are also used to direct economic behaviours of
individuals and businesses. For example they encourage individual
saving habits (Individual Savings Accounts, savings income and
dividend income nil rate bands) and giving to charity (Gift Aid
Scheme).
• Further they may discourage motoring (fuel duties), smoking &
alcohol (duties and taxes) and environmental pollution (landfill tax).
• As government objectives change, taxation policies may be altered
accordingly.
Social justice
• The taxation system accumulates and redistributes wealth within a
country.
• Different taxes have different social effects.
(a) Progressive taxation:
-As income rises the proportion of taxation raised also rises, for
example UK income tax
(b) Regressive taxation:
- As income rises the proportion of taxation paid falls, for example, tax
on cigarettes is the same regardless of the level of income of the
purchaser, so as income rises it represents a lower proportion of
income.
(c) Proportional taxation:
- As income rises the proportion of tax remains constant, for example
Latvian/Lithuanian income tax
(d) Ad Valorem principle:
- A tax calculated as a percentage of the value of the item, for example
Value Added Tax
Types of taxes
Tax Paid by
Income Tax Payable by individuals on most income
National Insurance Contributions Payable by individuals who are employed or self
employed and businesses in relation to their
employees
Capital Gains Tax Payable by individuals on the disposal of capital
assets
Inheritance Tax Payable by individuals on lifetime and death
transfers of assets.
Corporation Tax Payable by companies on income and chargeable
gains
Value Added Tax (VAT) Payable by the final consumer on purchases of
most goods and services
Direct and indirect taxation
Direct taxation
• Taxes are paid directly to the Government, based on income and
profit.
• Examples are:
-Income tax
-Corporation tax
-Capital gains tax
-Inheritance tax
Indirect taxation
• Taxes are collected via an intermediary who passes them on to the
government for example:
-VAT where the consumer pays VAT to a supplier trader, and
the trader then pays to the government
Tax avoidance and tax evasion
Tax evasion
• Any action taken to evade taxes by illegal means, for
example
(a) suppressing information - failing to declare taxable
income to HMRC
(b) providing false information - claiming expenses that
have not occurred
• Tax evasion carries a risk of fines and/or
imprisonment
Tax avoidance
• Any legal method of reducing your tax burden, for
example taking advantage of an Individual
Savings Account, making best use of
– available allowances, exemptions and reliefs, or
spouses and civil partners dividing ownership of
income producing assets to avoid
– higher rates of tax and enjoy lower rates of tax.
• The term is also used to describe tax schemes
that utilise loopholes in the tax legislation.
Illustration 1
Identify which taxes apply to the following situations and state
whether the tax is direct or indirect
• (a) A sole trader earns £100,000 profit in a year
• (b) A company has profit of £250,000 in a year and employs
30 employees
• (c) An individual sells an antique table for £100,000 which
cost £40,000 eight years ago
• (d) A business buys raw materials from a supplier
• (e) A company sells a factory for £750,000 bought for
£250,000 three years ago
• (f) An individual dies and bequeaths his estate of
£1,000,000 to his children

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