Lecture 15 - Taxes 1 Flashcards
Why should we care about tax
Need to have an accurate understanding of the net income we can spend
Need to understand how to invest as tax efficiently as possible
Do not want to okay more than we have to
Do not want to get in trouble with the tax authorities
Tax is a means of government to:
Raise money to spend on providing services to the course to such as: education, healthcare (18%), welfare, defence
Pensions - 20%
Transport and protection
Interest and other spending
Change public attitudes towards unhealthy spending e.g alcohol, tobacco, unhealthy food, plastic bags etc
Pay off national debt
Societal perspective
Interdependence between individuals and broader society
Individuals give to governments through taxation
Government funds expenditure to benefit society
Government also gives to individuals
Through benefits, childcare, pensions
Income tax
Pay as you earn (PAYE) - salaries and dividends
Personal allowance - currently £11,850
Everything earned beyond that is taxed at varying rates
Designed to be progressive - more you earn, more tax you pay
Non savings income tax rates
Personal allowance, 0% and £0-£11,850
Basic rate on income, 20% and £11,851-£46,350
Higher rate on income, 40% and £46,351 -£150,000
Additional rate on income, £150,000 and over 45%
Individual salary of £25,000 in 2017/18
Income Less personal allowance Taxable income Tax @ % Net income Effective tax rate
Individual salary of £50,000
Income - 50,000
Less personal allowance £11,500
Taxable income - £38,500
Tax @ 20% on £33,500 Tax @ 40% on £5,000 Total tax Net income Effective tax rate
Government encourages savings by giving a personal savings allowance (PSA)
Basic rate 1,000 Higher rate £500 Additional - rate nil Specific savings products are exempt from tax Bonds are taxed same way as savings
Salary of 20,000 and savings of £1,500
Non savings income 20,000
Less personal allowance £11,500
Taxable non-savings income £8,500
Tax @ 20% £1,700
Savings income, £1,500 PSA Basic Rate £1000 Taxable savings £500 Tax @ 20% £100 Net income £19,700 Effective tax rate
Individual savings accounts (ISA).
Interest from ISAs is exempt from income tax
2017/18 isa users can invest up to £20,000 in any combination of cash or shares
ISAs only apply to UK residents > 16 for cash ISA and aged > 18 for other types of ISAs
Must use your full allowance each year as the unused part cannot be carried forward, hence it it’s lost for good
Couples can have one each, so husband and wife can place £40,000 between them into ISAs
Help to buy
Help to buy ISA
- available from December 2015
- £1,200 in the first month then £200 per month thereafter
- Government top up of (up to £3,000) when used to buy first home
Junior ISAs
Junior version - applies to aged < 18 years old
Tax free allowance of £4,128
16-18 year olds can open JISA and cash ISA, save up to £24,128 tax free
ISA BENEFITS
No tax on interest No tax on gains (but losses cannot be offset against other income) No need to fill out tax return Short notice But generally lower interest rates
CAT Standards and ISAs
Many ISAs are CAT marked
Voluntary government standards on ISA products
C- charges should be fair Maximum management fees/ no one off charges and A - access should be easy Withdrawals paid with 7 days or less And T TERMS AND CONDITIONS should be clear Bank of England base rate reflected within 1 month
ISA vs PSA
ISA interest does not count towards your PSA
It is possible to have both: tax-free ISA + full £1,000 or £500 PSA allowance
Even with generally lower ISA rates, there are big tax advantages for base rate taxpayers or bigger savers who have used up the PSA
£1,000 a year interest seems a lot just now but interest rates could rise, so you could use ISAs to protect your savings from future tax
Taxation of dividend income
Dividends come from profits already taxed - double taxation
For all tax payers, there is a £5,000 allowance
For basic tax rate payers, a 7.5% tax is paid on income above the first £5,000 dividends
For higher tax rate payers, additional tax is paid on income above the original 7.5%
For earnings over £150,000 a further 5.6% is due
