Taxation: Personal Income Tax and Corporation Tax - Assignment Example

Taxation: Personal Income Tax and Corporation Tax s Personal income tax and corporation tax In 1975 the labour party was under the stewardship of Harold Wilson and James Callaghan. Callaghan was the Prime Minister and leader of the labour party from 1976 to 1980 (Morgan, 1997, p.23), a party that ruled the United Kingdom and Northern Ireland from 1974 to 1979. Their reign was marred with a series of industrial discontent and financial struggle. By the time the first general elections were being held on October 1974, the economy was already in recession. Although the economic growth was re-established in 1975, inflation had run to double digits standing at 20 % by the end of 1975. It remained that high for the rest of the government’s tenure (Butler and Butler, 2009). Taxation in the UK entails paying a minimum of two distinct government levels including the local government and the central government. The revenue for the local government are got majorly from business rates in Wales and England and council tax, and grants from the central government (Kessler, 2013, p.23-25). Over the years, the UK’s income tax has changed tremendously. Originally, the government had adopted tax measures that taxed a person’s income irrespective of who was the beneficially entitled (Kessler, 2013). A tax from people’s income tax is the single largest source of revenue to the government making up to 30 percent of the total revenue collected. Consequently, under the 1975 Labour government, the basic rate of personal income tax was 35% and the top rate was 83%, with the main rate of corporation tax standing at 52%. Personal income tax is defined as a direct tax that is usually levied on a person’s income (Government of the UK, 2014). Here, a person means an ordinary partnership, an undivided estate, an individual, a corporation, and a non-jurist body of a person. Generally, a person who is liable to personal income tax needs to pay tax, calculate his tax liability and file tax returns on an annual basis In relation to the top rate income tax, the top-rate income tax that was earned on income was reduced to 75 percent in 1971. Besides, a surcharge of 15 percent on investment income maintained the top-rate on that income at 90 percent. In the 1974-1975 periods, this cut was reversed raising the top rate on the earned income to 83 percent. With the surcharged investment income, this increased the investment’s top rate to 98 percent the highest permanent rate since the war. This was actually applied to incomes that were over £20,000, and together with a 15 percent surcharge on the ‘un-earned income including dividends and investments, thus adding up to 98 percent of the marginal rate of personal income tax. According to the World Tax Database (2008), the UK’s top marginal personal income tax rates from 1975-19179 were 83 % as shown in the figure below. Table1: Table showing the top marginal personal income tax rates from 1975-1986 (World Tax Database, 2008). 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 Australia 65% 65% -- -- 61.5% -- 60% 60% 60% 60% 60% 60% Turkey 68% -- -- -- -- -- -- 65% -- 60% 55% 50% United Kingdom 83% 83% 83% 83% 83% -- 60% 60% 60% 60% 60% 60% United States 70% 70% 70% 70% 70% 70% 69.13% 50% 50% 50% 50% 50% From the table, it was reported that the United States’ the top marginal tax rate shown above applied to married couples filing jointly. The top tax rate top tax rate does not take into account the effects of phasing-out itemized deductions or the personal exemptions (World Tax Database, 2008). On the other hand, the UK’s top tax rate was for married couples only as shown in table below. Table 2: Showing income tax allowances.   Income tax allowances       £ per year         Year Single Married Single parents additional personal allowance Personal allowance Married couple’s allowancea   Under age 65 Aged 65 or over Under age 65 Aged 65 or over Under age 65 Aged 65-74 Aged 75 or over Under age 65 Aged 65-74 Aged 75 or overb   1974-75 625 810 865 1,170 180 — — — — — — This rate comprises of a maximum state rate of 49% in 1975, it also includes a local income tax of 28% and a social security tax of 6%. This is the top tax rate on salary income, but does not incorporate the local taxes on income. This rate was applied to those incomes that were over £20,000, but as of April 6, 2014 it applied to incomes over £176, 477. In the 1975 budget, the top rate income tax was 83 %. The subsequent governments have further reduced this rate to 20 percent in 2007. The basic rate of personal income tax has been reduced by 15 points to 35 %. On the contrary, this decrease has been greatly offset by the rise in value added tax (VAT) and in national insurance contributions. On income over £150, 000, a new top rate of 50 percent was introduced in 2010. The most probable result of this was for the general public to disguise their revenue and income to the exchequer to go down (Kessler, 2013). This rate was cut to 45 percent and 20 percent in the 2012 and 2014 budgets respectively. As of April 6th, 2014, the equivalent rates will be 20% and 45% for personal income tax and 21%. Currently, a person owes tax solely on the income unto which he/she is beneficially entitled, unlike the previous years where a person’s income was taxed in spite of who was entitled (Butler and Butler, 2013) In the UK, each has an income tax personal allowance, although an income up to this amount is actually free from tax. For instance, in the fiscal year 2012/2013 the tax free allowance for the under-65s who have an income of less that £100, 000 was 8105. However, in 2014/2015 tax year, any income above the personal allowance will be taxed utilising various brands as shown in the table below. Table 3: Table showing personal allowance tax rate for the 2014/2015 tax year (Government of the UK, 2014). 2014/2015 Rate Dividend income Savings income Other income (inc employment) Band (above any personal allowance) Basic rate 10% 20% 20% £0 - £31,865 Higher rate 32.5% 40% 40% £31,866- £150,000 Additional rate 37.5% 42.5% 45% Over £150,000 The table above shows a removal of the 10% commencing from April 2008 that saw the 22% income tax rate reduce to 20% percent. Alistair Darling made an announcement that as from April 2010 there would be a new 50 percent income tax rate for those people who were earning more than £150,000 in the 2009 budget. Besides, the income threshold for high taxation rate was decreased (Clark & Dilnot, 2010). According to an article in the BBC news, for every £2 that is earned above £100,000, £1 is lost as personal allowance. This implies that for incomes between £100,001 and £116,210 the marginal tax rate is actually 60 percent (BBC News, 2011). The table below also shows how the recently applied taxation rates are applied. Table 3: Showing the income tax rates and taxable bands (Government of the UK, 2014). Income Tax rates and taxable bands Income Tax rates and taxable bands 2013 - 14 and 2014 - 15 Rate 2013-14 2014-15 Starting rate for savings: 10%* £0 - £2,790 £0 - £2,880 Basic rate: 20% £0 - £32,010 £0 - £31,865 Higher rate: 40% £32,011 - £150,000 £31,866 - £150,000 Additional rate: 50% N/A N/A Additional rate: 45% from 6 April 2013 Over £150,000 Over £150,000 In this case, the 10% starting rate is only applicable to savings income only. This means that after subtracting your personal allowance from the predisposed total come to the income tax, the non-savings income is higher than this limit, and then the 10 % starting rate for the savings will not apply. The non-saving’s income comprise of the following: profits from self-employment, pensions, income from employment, and income from property, as well as taxable benefits (Government of the UK, 2014). In relation to corporation tax, a corporation is defined by Kessler (2013, p.134) as a corporate body or other entity that is treated as a corporate for tax purposes. Corporation tax is a tax that is levied in the UK on the profits that have been made by companies, as well as the profits made on permanent establishments of the non-UK resident companies and those associations that carry out their business activities in the European Union. It forms the fourth-largest source of government revenue. Before the enactment of the corporation tax on 1 April 1965, both individuals and firms paid similar income tax. An additional profits tax was actually levied on companies. However, the Finance Act 1965 made a replacement of this structure for associations and companies and associations with a single corporate tax. It borrowed its rules and fundamental structure from the income tax system (Government of the United Kingdom, 2014). Ever since 1997, the UK’s Tax Law Rewrite Project has been progressively modernising the UKs tax legislation including the income tax and corporation tax. As a result, the rules and regulations that governed corporation tax and income have thus diverged (Kessler, 2013). In 1975, the corporation tax was at 52 %. It reduced to 20 % as of April 6, 2014. This is evident in the table below. Table 4: Showing rates for financial years 2011-2014 (Government of the United Kingdom, 2014). Rates for financial years starting on 1 April 2011-2014 Rate 2011 2012 2013 2014 Small profits rate 20% 20% 20% 20% Small profits rate can be claimed by qualifying companies with profits at a rate not exceeding £300,000 £300,000 £300,000 £300,000 Marginal Relief Lower Limit £300,000 £300,000 £300,000 £300,000 Marginal Relief Upper Limit £1,500,000 £1,500,000 £1,500,000 £1,500,000 Standard fraction 3/200 1/100 3/400 1/400 Main rate of Corporation Tax 26% 24% 23% 21% Special rate for unit trusts and open-ended investment companies 20% 20% 20% 20% The main rate of corporation tax is applicable if profits including ring fence profits are actually at a rate exceeding £1,500,000, or where there is no claim to another rate (Government of the United Kingdom, 2014). From the table, it can seen that from 1 April 2013 the rate decreased to 23 %, further to 21 % in the financial year beginning April 1, 2014 as compared to 52 % in 1975. A lower corporation tax means that the United Kingdom is a more attractive destination that you could initiate your business activities. A decrease in the main rate of the corporation tax promotes higher levels of business investment and also reduces the capital costs for businesses (HM Revenue and Customs, 2014, p. 2). Reference List BBC News. (2011, January 31). Retrieved April 6, 2014, from http://www.bbc.co.uk/news/business-12321524 Butler D., & Butler, G. 2009. Twentieth Century British Political Facts 1900-2000. Penguin Books: London. Clark, T., & Dilnot, A. (2010). Long Term Trends in British Taxation and Spending. London: Institute of Fiscal Studies. Government of the UK. (2014). HM Revenue and Customs. Retrieved April 6, 2014, from Income Tax rates and allowances: http://www.hmrc.gov.uk/rates/it.htm Government of the United Kingdom. (2014). Retrieved April 6, 2014, from Corporation Tax rates: http://www.hmrc.gov.uk/rates/corp.htm HM Revenue and Customs. (2014). Retrieved April 7, 2014, from Corporation tax: main rate : https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/179232/co rporation_tax_charge_and_main_rate_for_2014_small_profits_rates_for_2013.pdf.pdf Kessler, J. Q. 2013. Taxation of Non-Residents and Foreign Domiciliaries, (12th edition. London: Key Haven Publications. Morgan, Kenneth O. 1997. Callaghan: A Life. London: Oxford University Press. World Tax Database, 2008. 1975-1999: World Tax Database, Office of Tax Policy Research. Downloaded from http://www.wtdb.org/index.html: OECD Tax Database, Table I.7. http://www.oecd.org/dataoecd/44/2/1942506.xls [Retrieved on April 6, 2014]. Read More