Understanding of Taxation - Essay Example

Operation and scope of the tax system in U.K Income tax forms the bulk of revenues collected by the government. The second largest source of government revenue is National Insurance Contributions. The third largest source of government revenues is value added tax (VAT), and the fourth-largest is corporation tax. UK source income is generally subject to UK taxation no matter the citizenship nor the place of residence of the individual nor the place of registration of the company. The tax year in the UK, which applies to income tax and other personal taxes, runs from 6 April in one year to 5 April the next (for income tax purposes). Hence the 2009-10 tax year ran from 6 April 2009 to 5 April 2010. The tax year is sometimes also called the Fiscal Year. The Financial Year, used mainly for corporation tax purposes, runs from 1 April to 31 March. Financial Year 2010 runs from 1 April 2010 to 31 March 2011, as Financial Years are named according to the calendar year in which they start. Income tax liabilities of individuals: For individuals this means the UK income tax liability of one who is neither resident nor ordinarily resident in the UK is limited to any tax deducted at source on UK income, together with tax on income from a trade or profession carried on through a permanent establishment in the UK and tax on rental income from UK real estate. Individuals who are both resident and domiciled in the UK are additionally liable to taxation on their worldwide income and gains. Each person has an income tax personal allowance, and income up to this amount in each tax year is free of tax for everyone. For 2010-11 the tax allowance for under 65s is £6,475 which was raised to £7,475 on 22 June 2010. There are three slabs for rate of taxes – basic rate for the slab £0-£37,400 is 20%, above £37,400 is 40% and above £150000 is 50%. The taxpayers income is assessed for tax according to a prescribed order, with income from employment using up the personal allowance and being taxed first, followed by savings income (from interest or otherwise unearned) and then dividends. National Insurance contributions: On Employees: Employees pay National Insurance contributions to build up their entitlement to certain state benefits, including the State Pension. The contributions they pay depend on how much they earn and whether they are employed or self-employed. Employees stop paying National Insurance contributions when they reach State Pension age. They pay National Insurance contributions if they are an employee or self-employed and they are aged 16 and over, as long as their earnings are more than a certain level. State Pension age is 65 for men born before 6 April 1959 and 60 for women born before 6 April 1950. But it will gradually increase to 65 for women between 2010 and 2020. When starting as a new employee the employer is responsible for deducting Income Tax and National Insurance from the employee’s salary before he receives it. This system is called PAYE (Pay As You Earn). The employee gets the paperwork relating to PAYE from HM Revenue & Customs (HMRC) and his employer. Each payday the employer gives a payslip giving details of gross salary (before tax), Income tax and NIC deducted from the salary, earnings after tax (net salary) and the tax code of the employee. If the employee is starting his first job and doesnt have a P45, his employer will give him a P46 to fill in and sign. The employer will allocate a tax code and work out the tax due. HMRC will then process the empoyee’s P46 and, where necessary, revise his tax code. The Employees National Insurance number is his own personal account number. The number makes sure that the National Insurance contributions and tax they pay are properly recorded on your account. It also acts as a reference number for the whole social security system. The amount and type of National Insurance contributions they pay depend on whether they are employed or self-employed and how much they earn. If they are employed they pay Class 1 National Insurance contributions. The rates are: if they earn more than £110 a week and up to £844 a week, they pay 11 per cent of the amount they earn between £110 and £844 if they earn more than £844 a week, they also pay an extra 1 per cent of all their earnings over £844 Their contributions are deducted from their wages by their employer. On self-employed: If the taxpayer is self-employed he has to pay Class 2 and Class 4 National Insurance contributions. The rates are: Class 2 National Insurance contributions are paid at a flat rate of £2.40 a week Class 4 National Insurance contributions are paid as a percentage of their annual taxable profits - 8 per cent on profits between £5,715 and £43,875, and a further 1 per cent on profits over that amount. If their profits are expected to be less than £5,075 they may not have to pay Class 2 National Insurance contributions. They pay Class 2 National Insurance contributions either monthly by Direct Debit or by quarterly bill. They pay Class 4 National Insurance contributions when they pay their Income Tax. On Employers: Class 1 contributions are paid by employers and their employees. In law, the employee contribution is referred to as the primary contribution and the employer contribution as the secondary, but they are usually referred to simply as employee and employer contributions. The employee contribution is deducted from gross wages by the employer, with no action required by the employee. The employer then adds in their own contribution and remits the total to HMRC along with income tax. There are three milestone figures which determine the rate of NICs to be paid: Lower Earnings Limit (LEL), Earnings Threshold (ET) and Upper Earnings Limit (UEL). Below the LEL, no NICs are paid. On earnings above the LEL and below the ET, contributions are not paid but are credited by the government as if they were. This effectively assists the working poor to get benefits. On salaries between the ET and the UEL, NICs are collected at a rate which is determined by a number of factors. Class 1A contributions are paid by employers on the value of company cars and certain other benefits in kind provided to their employees and directors, at a rate of 12.8% of the value of the benefits in kind. Current Issues: Free Education Free education refers to education that is funded through taxation rather than tuition fees. Several European countries including England and Germany have historically had some form of free education. Free education has long been identified with "sponsored education". In the past, especially during the Renaissance, it was common practice among rich dignitaries to sponsor the education of a young man as his patron. In the late 18th century, Thomas Paine was a pioneer in being one of the earliest advocates of free public education. However, at that time it was considered to be a radical idea. In the United States, the governments compulsory education was introduced as free education during the late 19th century, and extended throughout the country by the 1920s. Compulsory education is typically funded through taxes. Over the years several countries have introduced cumpulsory education in various degrees. In Brazil, free education is offered by the Ministry of Education. The Ministry offers scholarships for graduate degrees, masters, doctoral and post-doctoral to Brazillians and immigrants having Brazil citizenship. Elsewhere, free education usually comes to students in the form of scholarships and grants. There are examples of free education being introduced in rapidly developing countries such as China and India. Even in some developing countries such as Sri Lanka education is free from the primary level upwards. However, in most of the Scandinavian countries education is completely free from primary school upto college education. In Norway and Finland, no fees apply for foreign students enrolling at a university. Internet has extensively helped to spread free education online. However, due to the extensive requirements of resources for online education, many open community projects have been initiated. In UK primary and secondary full-time education is compulsory for all children aged between 5 and 16. This is progressively being raised to the age of 18 years by 2015. State-provided schools are free of charge to students, and there is also a tradition of independent schooling, but parents may choose to educate their children by any suitable means. State-run schools and colleges are financed through national taxation, and take pupils free of charge between the ages of 3 and 18. The schools may levy charges for activities such as swimming, theatre visits and field trips, provided the charges are voluntary, thus ensuring that those who cannot afford to pay are allowed to participate in such events. Approximately 93% of English schoolchildren attend such schools. A significant minority of state-funded schools are attached to religious groups such as the Church of England or the Roman Catholic Church. There are also a small number of state-funded boarding schools, which normally charge for board but not tuition. Short Report on Remuneration packages: Remuneration Package 1: Any employee including a director who earns above £ 8,500 or more per year has to pay taxes on the benefits that he gets. 1. Gross Salary is £30,000. This is taxed at the rate of 20% between £0 - £37,400. Defined benefit final salary scheme 7% employee contribution, 8% employer contributions. It is a tax deferred savings vehicle that allows for the tax-free accumulation of a fund for later use as a retirement income. These benefits are indexed for inflation and usually capped at 5%. It is edefined in the sense that the formula for computing the employers contribution is known in advance. The most common type of formula used is based on the employee’s terminal earnings. Under this formula, benefits are based on a percentage of average earnings during a specified number of years at the end of a worker’s career. 2. Annual Bonus of 20% gross salary. When the employer pays the employee a bonus, its just part of his pay for the job. The bonus payment counts as earning and is added to the employee’s earnings and the employer is required to pay PAYE tax and Class 1 NICs. The employer includes it on the employee’s payslip with the rest of his pay. 3. Use of Company car (from a selection of vehicles with prices £20-25,000. Normally tax has to be paid by the employee on a company car provided by the employee depending on the total value of the benefit. The value of this benefit may depend on the car’s list price including any accessories, its carbon emissions and the type of fuel it uses. The employer reports the use of a car for business as well as private us by the employee in form P46 (car). 4. Laptop, Blackberry: No tax or NIC required to be paid by employer. 5. Health Club membership 6. Healthcare package: The employer has to pay tax on the value of the benefit provided by the employer. The premium of the medical insurance is the value of the benefit. To report on form P11D - section I and pay Class 1A NICs on the value of the benefit. 7. Membership of golf club: Report on form P11D - section M. Pay Class 1A NICs (but not PAYE tax) on the value of this benefit which is the amount paid for membership. 8. In house creche facilities: For childcare and creche facility no tax or NIC required to be paid. 9. Subsidised canteen facilities: No tax or NIC required to be paid Remuneration package 2: 1. Gross salary £25,000 2. Defined contribution Pension scheme 5% employee contributions, 5% employer contributions. In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individuals account. On retirement, the members account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. 3. Annual bonus of 15% of gross salary 4. Use of Company car upto value £18,000 or use of car pool or mileage allowance of 50p per mile 5. Mobile phone: No tax or NIC 6. Child care vouchers: The first £55 per week is exempt from tax and NICs and doesnt need to be reported to HMRC provided certain conditions are met. 7. Lunch vouchers: If vouchers for lunch other than in company canteen exceeding 15p employer has to report on form P11D - section C and paying Class 1 NICs (but not PAYE tax). 8. Flexi Time Policy: Working flexibly can bring many benefits to employee’s work-life balance. It can increase the time he has to care for a child or other family member and can make managing these responsibilities much easier. There are several different types of flexible working patterns, such as flexitime, homeworking and compressed hours. If the employee’s job is computer based and he does not have to be in the office every day he could work from home except on the days he has meetings or training. Conclusion: The employee must decide for himself how much he values the flexitime being offered by the employer in the package no.2 since the benefits offered by package no. 1 appear to be more attractive. Total wordcount: 2,268 Appendix Package 1: We shall first work out the cash equivalent of the benefits offered in package 1 to be recorded in individual forms P11D and then add them together to get a single figure: Healthclub (assuming annual corporate membership fee to be £240) = £ 240 Golfclub (assuming annual Par membership fee to be £150) = £ 150 Healthcare (assuming annual membership fee to be £150) = £ 150 Car (@ 22% of price of car being £20,000) = £ 4,400 Fuel (@ 24% of price of car being £20,000) = £ 4,800 Total = £ 9,740 We now multiply this figure by the Class 1A NICs percentage rate which for 2009-10 tax year is 12.8% to get the contribution of the employer: £ 9,740 x 12.8% = £ 1,246.72 = £ 1,247 (rounded off) We now workout the take home salary for this package: Gross salary = £ 30,000 Less: 7% contribution to defined final salary scheme by employee = £ 2,100 £ 27,900 Add: Bonus @ 20% = £ 6,000 Total = £ 33,900 Less: Income Tax payable @ 20% = £ 6,780 Net take home salary = £ 27,120 Package 2: Car (@ 22% of price of car being £18,000) = £ 3,960 Fuel (@ 24% of price of car being £18,000) = £ 4,320 Total = £ 8,280 We now multiply this figure by the Class 1A NICs percentage rate which for 2009-10 tax year is 12.8% to get the contribution of the employer: £ 8,280 x 12.8% = £ 1059.84 = £ 1,060 (rounded off) We now workout the take home salary for this package: Gross salary = £ 25,000 Less: 5% contribution to defined contribution pension scheme by employee = £ 1,250 £ 23,750 Add: Bonus @ 15% = £ 3,750 Total = £ 27,500 Less: Income Tax payable @ 20% = £ 5,500 Net take home salary = £ 22,000 References 1. Advice Guide: Tax – In England: http://www.adviceguide.org.uk/index/life/tax/income_tax_rates.htm 2. City MCA – Fitness: http://www.cityymca.org/upload_files/Prices%20and%20Opening%20Hours.pdf 3. Class 1A National Insurance Benefits on Car and Fuel Benefits; A guidance for Employers: http://www.hmrc.gov.uk/guidance/ca33.pdf 4. Directgov – Public Services all in one place: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/WorkingAndPayingTax/DG_10016783 5. Directgov – Public Services all in one place: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/NationalInsurance/IntroductiontoNationalInsurance/DG_190048 6. HMRC PAYE and NIC Rates and Limits for 2010-11: http://www.hmrc.gov.uk/paye/exb/index.htm 7. London Golf Club – Membership options: http://www.londongolfclub.ca/membership-options/ 8. P11D Working Sheet 2 – Car and Car Fuel Benefits for 2009-10: http://www.hmrc.gov.uk/ebu/p11d-ws2-2010.pdf 9. Wikipedia – Defined Benfit Pension Plan: http://en.wikipedia.org/wiki/Defined_benefit_pension_plan 10. Wikipedia – Education in England: http://en.wikipedia.org/wiki/Education_in_England 11. Wikipedia – Free Education: http://en.wikipedia.org/wiki/Free_education 12. Wikipedia – Pension: http://en.wikipedia.org/wiki/Pension 13. Worldwide-tax.com: U.K. Tax Laws and Tax System http://www.worldwide-tax.com/uk/uk_taxes_rates.asp Read More