The U.K taxation system Essay Example | Topics and Well Written Essays - 2750 words

The U.K taxation system - Essay Example The paper tells that taxable income includes income from employment either from part-time, full-time, or temporary employment. However, if people receive benefits or perks from their employer, they may be taxable. Income from partnerships or self-employment, pension income such as state pension, retirement annuity and personal or company pension, are also taxable as stated in the UK tax laws. Additionally, pensioner bonds, trust income and investment income, includes dividends on company shares except dividend income from ISAs, are also taxable. Other taxable income includes Rental income, State benefits such as Carer’s Allowance, Jobseeker’s allowance, Employment and Support Allowance, Incapacity Benefit, and weekly Bereavement Allowance among others. The income tax rates in the UK depend on an individual’s personal income. According to Adam, Kaplan and Institute for Fiscal Studies, the 10% rate shows the tax rate for anybody who saves an income of up to GBP 2,4 00. The dividend income below GBP 37,400 is taxed at 10% while that above GBP 37,400 to GBP 150,000 is taxed at 32.5%. In addition, a tax of 42.5% is taxed on dividend income above GBP 150,000. Thus, this shows that income tax is lower in the UK than most countries including New Zealand and Australia. The relevant tax period in the UK starts from 6th April to 5th April in the next year. This includes both income tax and personal taxes. For instance, the 2010-2011 tax year started on 6th April in 2010 and ran through to 5th April 2011. (Adam, Kaplan and Institute for Fiscal Studies, 2002). In the UK, taxes and allowances are usually fixed for any given year, but they often change from one year to another. What is the relative importance of direct and indirect taxes in United Kingdom? What are the implications of this? Direct tax consists of income tax and wealth tax while indirect tax involves central excise duty, customs duty, service tax, purchase tax and value added tax (VAT). Inc ome tax is a direct tax on all incomes that are received by private individuals after some allowances are made. Direct taxes are usually paid directly to the Exchequer by the taxpayer through PAYE, which applies to corporate tax, as well. However, tax liability cannot be forwarded to someone else. Indirect taxes are such as VAT and several excise duties on tobacco, oil and alcohol. Indirect tax, unlike direct tax can be passed onto the final customer by the supplier depending on the price of elasticity of demand and supply of goods. However, over the last twenty years, economists have differed on the optimum mix of taxation between direct and indirect taxes, which has resulted in a shift towards indirect taxation. Economists argue that indirect taxes help in changing the overall pattern of demand for certain products and services, thus, affecting consumer demand such as an increase in the real duty on petrol. Indirect taxes are also useful in controlling and correcting externalities of both production and consumption. Also, they are less likely to interfere with people’s choice between work and leisure than the direct tax. Thus, they have a little negative effect on work incentives. Additionally, they allow a reduction in direct