Income Tax in United Kingdom - Example

INCOME TAX IN UNITED KINGDOM Student’s name Code & Course Professor’s name Date Introduction This is the tax imposed on annual gains or profits earned by individuals, limited companies, businesses and other organizations. It is a direct tax imposed on individual’s income such as pay as you earn (PAYE), and corporate tax and these taxes are deducted at the source. These form of tax is progressive in nature implying that people with high income are taxed highly whereas those with low income are taxed lowly. Brief history of income tax in United Kingdom It was started in 1799 by William Pitt and later reformed in 1966 (Cloyne, J, 2016) .In 1816, the income tax system was abolished after signing peace of Amiens. It was reintroduced in 1842 (Cloyne, J. 2015). The income tax system in United Kingdom have been undergoing dynamic reformations. After the First World War in 1973, there was an increment of marginal rate of earned income from 30% to 75% and a 5% surcharge of investment income. In 1980s, marginal income tax rate reduced by 80% then to 40%. The investment income surcharge was eradicated (Briggs, A. 2013). Between 1985 and 1994, tax rates reduced with the number of rates in United Kingdom. Income tax in United Kingdom was referred to as super tax. Upto 1989, income tax units were computed by merging incomes of wives and husbands. In 1990, independent income taxation system was introduced with a small control for total income. In 1973 there was a graduated rate in the introduction of super tax which was later referred to as surtax. This development was as a result of increasing marginal rates of tax. After the First World War, income tax was double the average tax and the minority were able to pay this tax Models of Top Earnings The models of top earnings were used in 1957 to compute income tax systems in relation to theoretical concept of income tax. The models were used together with Pareto exponent for the executive arrangement in a structural way. The formula given below was used to compute income tax in accordance to ranks. α= loge [span of managerial control] / loge [1+ increment with promotion] This made the high income earners to pay a relatively higher income tax leading to fair distribution of income. Main changes in United Kingdom income tax The main changes in income tax include: top rate cut, basic rate cut, introduction of independent taxation and married couple allowance. The basic rate cut The basic rate cut is a form of income taxation where the income tax was computed from the total earned salary (Burkhauser, R. 2016)). This is evidenced after the first and Second World War in around 1945 where the increased marginal rate of tax increased the total income tax. Consequently most of low income earners were unable to pay income tax. Top salary earners paid a relatively higher income tax compared to the low income earners. During battles in 1939 and 1945, the basic rate on total income decreased. This resulted to a decreased income tax from 0.1 to 16.6% in 1990 (Nolan, B. 2016). Effects of wars reduced toyal income reducing the economic condition of an individual. As a result, the government attempts to reduce the income tax. Increasing income after the wars increases income tax from 11.2% in 1938 to 16.6% in 2000 (Colyne, J 2014). Top rate cut After the First World War, the total income reduced. This in turn led to the reduction in the top rate income tax to almost 0.1 %( Briggs, A. 2013). The income tax recovered upto 1939 but immediately fell as a result of World War II. Wars reduced the income earnings of individuals resulting to the decrease in the top shares and income. As a result, the income tax reduced from 16.6% to 11.2% (Nolan, B. 2016). Aftermath, the top rates of shares increased which had a positive bearing to income tax. In 1990 and 2000, the share of the top upto 4.8%. (Holland, D. 2014) hence leading to an increase in income tax. Independent taxation and married couple allowance In 1970s, there was move for independent taxation of husbands and wives. They were given allowances (Colyne, J. 2016). Couples were given allowances in relation to their income. High income earners were entitled to higher allowance (Holland, D.2014). This followed the Poreto Lorenz Coefficient for the UK. In earlier years during the World War I and World War II, the total couple allowances were low. This was so because of low income during those periods. The allowance was highest in 1978 this was due to independent taxation system (Devereux, M.2015). The system ensured that married couples are entitled to tax benefits from their income taxes Financial and non-financial benefits of income tax in United Kingdom Raise in government revenue The revenue is required for the goods and services provided by the government. These goods are of two types, merit goods and public goods. Public goods like defense are paid for by income tax. These goods have to be provided by the government. Merit goods like medical care, education and transport are mostly provided by the government of UK from the income tax payable by the citizens. Economic stability These tax are imposed to maintain the economic stability of United Kingdom. During inflation the government imposes more income tax in order to discourage expenditure of the individuals. During deflation they are reduced to make the individuals spent more money. This decreases or increases price fluctuations for economic stability. The government also uses this tax to pay national and international debts. Fair distribution of income in United Kingdom. Income tax is also imposed in order to bring about fair distribution of income. High income earners are taxed more than the low income groups. This regulates the income disparity in a state.Resoruses are also evenly distributed in the entire United Kingdom state. For development of public utilities Income tax is an input in the development of social structures. The United kingdoms government utilizes income tax in construction of transport and communication networks to be used by her citizens. In conjunction to this, social amenities like hospitals, schools, sports grounds, e.t.c are developed from the imposed income tax. Enhancing social welfare Through income tax, the government of united kingdom is Able invest in different sectors. As a result, many people become employed for their economic being. The government, through different sectors like the ministry of health, transport or ministry of of industry and trade looks at individual citizens welfare. Citizens get standadered.medical care, education and plenty supply for citizens use. Technological improvement Income tax contribute to the purchase of modernised tools to be used in production process. In united kingdom, citizens are readily willing to embrace technical advancement. The government use the income tax imposed on them to purchase sophisticated equipments to effect production process. Conclusion In conclusion, income taxation systems have drastically changed over time in United Kingdom. This has resulted into dynamism in social stratification where different individuals have raised their living standard. The government has also used this funds for the economic as well as the social being of this state. Reference list Arena, M.P. and Kutner, G.W., 2015. Territorial tax system reform and corporate financial policies. Review of Financial Studies, p.hhv005. http://rfs.oxfordjournals.org/content/early/2015/02/09/rfs.hhv005.short(14/11/2016) Arratia, Richard, and Stephen DeSalvo. "Probabilistic divide-and-conquer: a new exact simulation method, with integer partitions as an example." Combinatorics, Probability and Computing 25, no. 3 (2016): 324-351. https://www.cambridge.org/core/journals/combinatorics-probability-and-computing/(14,11/2016) Arratia, R. and DeSalvo, S., 2016. Probabilistic divide-and-conquer: a new exact simulation method, with integer partitions as an example. Combinatorics, Probability and Computing, 25(3), pp.324-351. https://www.cambridge.org/core/journals/combinatorics-probability-and-computing/article/probabilistic(14/11/2016) Harzing, Anne-Wil, and Satu Alakangas. "Google Scholar, Scopus and the Web of Science: a longitudinal and cross-disciplinary comparison." Scientometrics 106, no. 2 (2016): 787-804. http://link.springer.com/article/10.1007/s11192-015-1798-9(14/11/2016) James, S., Sawyer, A. and Wallschutzky, I., 2015. Tax simplification: A review of initiatives in Australia, New Zealand and the United Kingdom. eJournal of Tax Research, 13(1), p.280. http://search.proquest.com/openview/f7c4cd249eb6557e41daba654be1a03b/1?pq-(14/11/2016) Kakwani, N.C., 1977. Measurement of tax progressivity: an international comparison. The Economic Journal, 87(345), pp.71-80. http://www.jstor.org/stable/2231833(14/11/2016) Martín-Martín, A., Orduna-Malea, E., Ayllón, J.M. and López-Cózar, E.D., 2016. The counting house: measuring those who count. Presence of Bibliometrics, Scientometrics, Informetrics, Webometrics and Altmetrics in the Google Scholar Citations, ResearcherID, ResearchGate, Mendeley & Twitter. arXiv preprint arXiv:1602.02412. http://arxiv.org/abs/1602.02412(14/11/2016) Murray, B. and Rivers, N., 2015. British Columbia’s revenue-neutral carbon tax: A review of the latest “grand experiment” in environmental policy. Energy Policy, 86, pp.674-683. http://books.google.com/books?hl=en&lr=&id=MlKFCwAAQBAJ&oi=fnd(14/11/2016) Wang, J., Deng, Y., Song, C. and Tian, D., 2016. Measuring time accessibility and its spatial characteristics in the urban areas of Beijing. Journal of Geographical Sciences, 26(12), pp.1754-1768. http://link.springer.com/article/10.1007/s11442-016-1356-2(14/11/2016) Read More