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Taxation in the United Kingdom



The income tax was first implemented in Britain by William Pitt the Younger in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic Wars. Pitt's new graduated (progressive) income tax began at a levy of 2d in the pound (0.8333%) on incomes over £60 and increased up to a maximum of 2s (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million, but actual receipts for 1799 totalled just over £6 million.[4]

Income tax was levied under five schedules—income not falling within those schedules was not taxed. The schedules were:

  • Schedule A (tax on income from UK land)
  • Schedule B (tax on commercial occupation of land)
  • Schedule C (tax on income from public securities)
  • Schedule D (tax on trading income, income from professions and vocations, interest, overseas income and casual income)
  • Schedule E (tax on employment income)

Later a sixth Schedule, Schedule F (tax on UK dividend income) was added.

Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801, after Pitt's resignation over Catholic Emancipation. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo. The UK income tax was reintroduced by Sir Robert Peel in the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150.

UK income tax has changed over the years. Originally it taxed a person's income regardless of who was beneficially entitled to that income, but now a person only owes tax on income to which he or she is beneficially entitled. Most companies were taken out of the income tax net in 1965 when corporation tax was introduced. Also the Schedules under which tax is levied have changed. Schedule B was abolished in 1988, Schedule C in 1996 and Schedule E in 2003. For income tax purposes, the remaining schedules were superseded by the Income Tax (Trading and Other Income) Act 2005, which also repealed Schedule F completely. The Schedular system and Schedules A and D still remain in force for corporation tax. The highest rate peaked in the Second World War at 99.25% and remained at about 95% till the late 1970s.[citation needed]

In 1974 the top-rate of income tax increased to its highest rate since the war, 83%. This applied to incomes over £20,000, and combined with a 15% surcharge on 'un-earned' income (investments and dividends) could add to a 98% marginal rate of personal income tax. In 1974, just 750,000 people were eligible to pay the top-rate of income tax. [5] Margaret Thatcher, who favoured indirect taxation reduced personal income tax rates during the 1980s. [6]

The Finance Act 2004 introduced an income tax regime known as "pre-owned asset tax" which aims to reduce the use of common methods of inheritance tax avoidance.[7]

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National Insurance contributions

Main article: National Insurance

The second largest source of government revenues is National Insurance contributions (NIC), payable by employees, employers and the self-employed. Unlike income tax, Class 1 (non self-employed persons) NIC is paid between lower and upper thresholds, or between £82 and £630 per week for 2005-06.[8] A zero rate of NIC applies to earnings between the lower earnings limit of £82 per week and the earnings threshold of £94 per week (in 2005-06) to protect employees' contributory benefit entitlements. National Insurance is levied at 11% (that is, 11p in the £), but can be contracted-out for persons with a qualifying pension scheme with a reduction of 1.6%. There has also been the addition of a 1% rate on income above the upper threshold in recent years. Employers pay an additional 12.8% on earnings over the lower earnings threshold (£94 per week), but without the upper threshold, so total earnings are taxed at 12.8% per employee.

Employers are additionally liable to Class 1A NIC at 12.8% on most benefits-in-kind provided to employees which are subject to income tax in the hands of the employee, and to Class 1B NIC (also at 12.8%) on the value of the tax and on certain benefits paid via a "PAYE Settlement Agreement".

There are also separate arrangements for self-employed persons (who are normally liable to Class 2 flat rate NIC and Class 4 earnings-related NIC), married women, and voluntary sector workers.

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Value added tax

The third largest source of government revenues is value added tax (VAT), charged at the standard rate of 17.5% on supplies of goods and services. It is therefore a tax on consumer expenditure. Certain goods and services are exempt from VAT, and others are subject to VAT at a lower rate of 5% (the reduced rate) or 0% ("zero-rated").[9]

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Corporation tax

Main article: United Kingdom corporation tax

The fourth largest source of government revenues is corporation tax, charged on the profits and chargeable gains of companies. The main rate is 30%, which is levied on taxable income above £1.5m. In 2005-06, income below this level was taxed at 0% and 19%,[10] but with marginal reliefs in between the bands. The 0% starting rate has been abolished with effect from 1 April 2006.

There is also a Supplementary charge to Corporation Tax for companies involved in petroleum exploration (for example in the North Sea) which is levied at a rate of 20% for profits arising from 1 January 2006 (previously the rate was 10%).

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Excise duties

Excise duties are charged on, amongst other things, motor fuel, alcohol, tobacco, betting and vehicles.

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Stamp duty

Stamp duty is charged on the transfer of shares and certain securities at a rate of 0.5%. Modernised versions of stamp duty, stamp duty land tax and stamp duty reserve tax, are charged respectively on the transfer of real estate and shares and securities, at rates of up to 4% and 0.5% respectively.[11]

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Inheritance tax

Main article: Inheritance Tax (United Kingdom)

Inheritance tax is levied on "transfers of value", meaning:

  1. the estates of deceased persons;
  2. gifts made within seven years of death (known as Potentially Exempt Transfers or "PETs");
  3. "lifetime chargeable transfers", meaning transfers into certain types of trust. See Taxation of trusts (United Kingdom). Legislation announced in the 2006 budget but not yet enacted will extend this category to many more trusts than previously.

The first slice of cumulative transfers of value (known as the "nil rate band") is free of tax. This threshold is currently set at £300,000 (tax year 2007-08)[12] and, although it is raised annually, it has recently failed to keep up with house price inflation with the result that some 6 million households currently fall within the scope of inheritance tax. Over this threshold the rate is 40% on death. Any inheritance tax must be paid by the executors or administrators of the estate (the burden falling upon the beneficiaries) before probate is granted.

Transfers of value between UK-domiciled spouses are exempt from tax. Recent changes to the tax mean that nil-rate bands will be transferable between spouses to reduce this burden - something which previously could only be done by setting up complex trusts.

Gifts made more than seven years prior to death are not taxed; if they are made between three and seven years before death a tapered inheritance tax rate applies. There are some important exceptions to this treatment: the most important is the "reservation of benefit rule", which says that a gift is ineffective for inheritance tax purposes if the giver benefits from the asset in any way after the gift (for example, by gifting a house but continuing to live in it).

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Motoring taxation

Main article: Motoring taxation in the United Kingdom

Motoring taxes include: fuel duty (which itself also attracts VAT), and vehicle excise duty. Other fees and charges include the London congestion charge, various statutory fees including that for the compulsory vehicle test and that for vehicle registration, and in some areas on-street parking (as well as associated charges for violations).

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Business rates

Main article: Business rates

Business rates is the commonly used name of non-domestic rates, a United Kingdom rate or tax charged to occupiers of non-domestic property. Business rates were introduced in England and Wales in 1990, and are a modernised version of a system of rating that dates back to the Elizabethan Poor Law of 1601. As such, business rates retain many previous features from, and follow some case law of, older forms of rating.

Business rates form part of the funding for local authorities, and are collected by them, but rather than receipts being retained directly they are pooled centrally and then redistributed. In 2005/06, £19.9 billion was collected in business rates, representing 4.35% of the total UK tax income.[13]

Business rates are a property tax, where each non-domestic property is assessed with a rateable value, expressed in pounds. The rateable value broadly represents the annual rent the property could have been let for on a particular valuation date according to a set of assumptions. The actual bill payable is then calculated using a multiplier set by central government, and applying any reliefs.[14]

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See also

UK related

Local taxation

General category

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Notes

  1. ^ a b Rates and Allowances - Income Tax. HM Revenue & Customs. Retrieved on 2008-04-08.
  2. ^ Personal Allowance RaisePersonal Allowance Raise. BBC. Retrieved on 2008-05-13.
  3. ^ Rates and Allowances - Capital Gains. HM Revenue & Customs. Retrieved on 2007-01-24.
  4. ^ A tax to beat Napoleon. HM Revenue & Customs. Retrieved on 2007-01-24.
  5. ^ IFS: Long-Term trends in British Taxation and Spending
  6. ^ Thatcher Economics
  7. ^ REV BN 40: Tax Treatment Of Pre-Owned Assets
  8. ^ Rates and Allowances - National Insurance Contributions. HM Revenue & Customs. Retrieved on 2007-01-24.
  9. ^ Introduction to VAT. HM Revenue & Customs. Retrieved on 2007-01-24.
  10. ^ Rates and Allowances -Corporation Tax. HM Revenue & Customs. Retrieved on 2007-01-24.
  11. ^ Stamp Duty Land Tax Rates From 23/03/06 including archived Budget and Finance Bill information. HM Revenue & Customs (2006-03-23). Retrieved on 2007-01-24.
  12. ^ Rates and Allowances - Inheritance tax. HM Revenue & Customs. Retrieved on 2007-01-24.
  13. ^ Public Finances Databank (see section C4), HM Treasury, retrieved 26 March 2007. Percentage based on Net taxes & NICs conts.
  14. ^ The rates bill - How is it calculated?, mybusinessrates.gov.uk

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References

  • Taxation of Foreign Domiciliaries, by James Kessler QC, Key Haven Publications, 5th edition (2005) - discusses taxation of individuals who are UK resident but not UK domiciled.

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External links




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