Income Tax in the United Kingdom - Essay Example

Income Tax in The UK Income tax is the government levy that is imposed on organizations and individuals that varies with their profits or income (Great Britain,2010). Corporation tax is the income tax charged on business entities. Individuals who form partnerships are taxed on the shares of their partnership items. Tax rates are bound to increase as taxable income also increases. In the UK rates of income tax individuals pay depend on how much of their taxable income is above their personal allowances within the tax year. The current tax year is from 6 April 2014 to 5 April 2015. Great Britain (2010) noted that an income tax of 20% is automatically charged on savings interest while those who are married and one of the spouses was born before 6 April 1935 are able to claim a Married Couple’s Allowance hence reducing the tax bill. The UK government is fair because those who are blind are able to claim the Blind Person’s Allowance. This paper is going to give opinions on if the UK government should restore the 50% additional rate of income tax. First, the paper will provide an explanation of the recent history of the additional rate of the income tax and then discuss arguments in favor of and against the restored rate of 50%. History of the additional income rate Great Britain (2010) noted that in 2009, Alistair Darling the then Chancellor announced that there would be tax increases in order to contribute over six billion pounds by the year 2012. The reason behind this was ensure that the economic future of the country was secured and to provide assistance for citizens when they require it most. The changes incorporated an increase in the indirect taxes rates for instance duties on alcohol and road fuel for that current year, variations in income tax from the month of April 2010 that included a new 50% rate on all incomes above 150,000 pounds. Great Britain (2010) stated that the new additional 50% rate brought about many feedbacks about the Budget, as individuals viewed it as a valuable change in the Labor government’s approach to taxing those who are wealthy in the society. There were many debates among citizens wondering if the changes would enable the government to get as much as they had anticipated. For instance, 1.3 billion pounds in November 2010 rose to 3.05 billion pounds in December 2011. Great Britain (2010) noted that UK consisted of 31.3 million-taxpayer population but according to the revenue and customs estimate, only 236,000 citizens were entitled to pay the 50% rate in November 2010. Great Britain (2010) noted that the Liberal Democrat Government never mentioned the 50% rate in the union that was underpinning the Coalition although they announced to the public that personal allowances would be raised in the Budget in order to assist the middle and lower income earners as the first step towards setting the allowances at 10,000 pounds. During the opening Budget speech on 22 June 2010, George Osborne, the Chancellor verified that personal allowances would be increased from 1,000 pounds to 7,475 pounds from April 2011, while on the other hand the Budget report noted that the 50% rate would be implemented for the time being (Great Britain, 2010). The details about the structure of the new income tax of 2010 were set out as follows: There would be two major rates of income tax for 2009-2010. The 20% basic rate of income tax would apply to the taxable income of up to 37,400 pounds. The 40% higher rates would apply to individuals with taxable income that would be above 37,400 pounds. The 50% additional tax rate would be taxable to individuals earning above 150,000 pounds as from April 2010. There would be three rates of tax for the dividends from 2010-2011. The 20% basic rate would continue being taxed at 10% dividend ordinary rate, the 40% taxed at 32.5% dividend upper rate while the 50% additional rate would be taxed at a new 42.5 % additional rate. This shows that the dividend trust rate would be raised from 32.5% to 42.5% hence the trust rate would be raised from 40% to 50%. During the second Budget on 23 March 2011,the then Chancellor decided that no changes would be made to the rates of the income taxes for the next year but emphasized his concerns that the 50% rate would cause a lasting damage to the UK economy if would be made permanent (Great Britain,2010). The Chancellor hence suggested that the HM Revenue and Customs (HMRC) should review the amount of revenue 50% rate actually raises. Mr Osborne later on announced that the department the tax payers were shifting their incomes into the previous tax year in order to evade the 50% rate at an expensive cost to the payer of 1 billion pounds (Great Britain,2010). Mr Osborne argued that no leader would justify a rate that destroys the economy and raises little amounts of money; these arguments facilitated the income tax rates to be reduced to 45% from April 2013. Ed Balls one of the shadow chancellors vowed to restore the 50% additional rate of income tax if elected because he believes that it would raise a lot of money to help in the reduction of the budget deficit and hence ensuring a better tax system. The shadow chancellor had intentions to restore the economic credibility that was dented. He argued that taxing 50% on individuals who earn more than 150 000 pounds would raise 10 billion pounds in three years. Reasons for and against There were intense arguments in favor of and against the restoration of the 50%, additional rate of income. Reasons for the idea Restoring the 50%, additional rates of income tax would enable the individuals with high incomes to be taxed higher hence reducing UK’s deficits. The main reason for restoring the tax would be to improve the economic status of the country as Ed Balls noted. Great Britain (2010) observed that HMRC figures showed that individuals earning over 150 000 pounds were able to pay 9.5 billion pounds in tax when the 50% additional rate had been introduced which is greater than what the Government had estimated. Restoring this tax increase would enable the Government to secure the economic future and provide help for the needy and low-income earners in the society. Reasons against the idea Conservatives argued that the addition in income tax would be a risky move to the recovering economy. Liberal Democrats and business chief criticized the pledge and argued that reintroducing the 50% rate in the UK would be a national disaster. After the Chancellor’s announcement of the new 50% additional rate increase in income tax, there were concerns that there would be changes in the Labor Government’s personal taxation approach since they projected that this measure had limited revenues in the context of the increasing size of public deficit. Great Britain (2010) noted that citizens had been told that in 2009-2010 there would be a budget deficit of 38 billion pounds, which the Chancellor revised to 118 billion pounds in November pre-budget reports and to 175 billion pounds later on, which shows a decline of 137 billion pounds. The new 50% additional income tax, restricting tax reliefs on pensions and scrapping tax allowance would increase at least 7 billion pounds. Great Britain (2010) stated that lowering the deficits to manageable levels would require long periods of incredibly high growth, reduced public spending, and increased taxes. Great Britain (2010) stated that individuals felt that restoring the 50% additional rate of income tax would a good attempt to share the pains of paying tax but it would it would not help much to reduce the wide gap in public finances since it was not combined with the measures on capital. Other leaders felt that the changes would bring fewer revenues to the country hence it was a waste of time. Great Britain (2010) noted that if the labour government needed more revenues, they would have to acknowledge and be honest that it comes from basic income rates and Value added tax (VAT) that were higher. Economists in the country observed that the additional tax changes would irritate 1-2% of the taxpayers affected hence hardly solving the problem. This restoration process will therefore require further painful measures to be implemented. ` Great Britain (2010) stated that the decision to restore the 50% additional income tax rates would in the UK would punish bankers and will therefore make them shift to Geneva. Individuals argued that the plan to raise taxes on the rich only was not about raising money and should be discouraged. The 50% tax rate would prevent talented individuals and tourists from investing and creating new jobs in the UK because their efforts would be taken for granted. According to Great Britain (2010) it is unfair for the government to focus on only the rich to contribute revenues rather than dealing with the whole country at individual levels. Tax systems should be fair and progressive and when a country decides to raise money from specific social groups like the rich, they will have limited revenues. In the research, studies done by Great Britain (2010) it is clear that those countries that contribute high and serious revenues require a wide tax base and do not focus on small minority groups of high income earners. According to Great Britain (2010), some individuals argued that the new 50% additional rate on income tax was an unexpected and pointless gamble in the past and hence restoring the measures would not be any different. The UK is trying to restore their business confidence and to improve their consumption and housing issues and therefore introducing an increase in tax to selected few would cause even more problems because they would feel extorted by the government. Conclusion Income tax is the government charge that is imposed on organizations and individuals in the society. The 50% additional rate of income tax is a levy that was charged on individuals earning above 150,000 pounds hence affecting only the rich people in the society. The tax increases were meant to secure the economic future of the country and provide help to the need in the society. Restoring the 50% additional rate of income tax would enable the government to improve their economy in the failing areas. Most individuals were against the idea of restoring the 50% income increase because they felt that only the rich were targeted and hence this could scare individuals from investing and starting new businesses in the UK. The Liberal Democrats, the conservative party and other society members felt that 50% income tax increase was a disaster and would lead to loss of revenues. From all these arguments, it is clear that the UK government should not restore the 50% additional rate of income tax. Reference GREAT BRITAIN. (2010). Budget 2010: return to an order of the House of Commons dated 22 June 2010 : copy of economic and fiscal strategy report and financial statement and budget report - June 2010. London, Stationery Office. Read More