w1 and 2 Flashcards
What is Tax?
A tax is a compulsory financial charge imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to collectively fund government spending, public expenditures, or as a way to regulate and reduce negative externalities.
Why pay TAX?
- As well ashelping to provide funding for public services, our income tax is spent on investment in public projects, such as roads, rail, housing and communications.
- Taxes influence behaviours… even death. (Tobacco and Apple)
- Wealth redistribution. (The top 1% pays more tax than the % of them in general income)
Types of income?
1) Earnings - Do work, get paid.
- Employment:
- Subject to PAYE (Pay As You Earn) – employer deducts taxes from wages, pays “net” to employee and amounts deducted to HMRC.
Typical deductions:
- Tax
- National Insurance
- Student Loan
- Pension
- Self-employment
2) Investments - Put money into something, the return generated each year is income.
3) Selling things - Own something for a while, sell it, the gain is income.
Difference btw self-employment and employment
Self-emp is cheaper for everybody and it is a contract FOR services.
Employment is a contract OF service.
Fiscal Drag
When the tax bands are not adjusted to inflation and ppl get taxed more.
What happens when you earn more than 100,000?
Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £125,140 or above.
National Insurance
funds NHS, social care and pensions.
hypothecated tax
the proceeds from the tax will be used to fund a specific program or service that is related to the tax. For example, a tax on petrol and diesel might be used to fund road and highway construction, while a tax on cigarettes might be used to fund healthcare programs.
NI band
Lower Earnings Limit (LEL) £533 per month
(Benefits earned)
Primary Threshold (PT) £1,048 per month
(Employees start paying)
Secondary Threshold (ST) £758 per month
(Employers start paying)
Upper Earnings Limit (UEL) £4,189 per month
(Employees start paying a lower rate)
Rates for NI
For employee (Ee NIContr):
Between PT and UEL = 12%
Above the UEL = 2%
For Employer (Er NIC):
above the ST = 13.8%
The benefit of self-empl?
The company doesn’t have to pay holiday pay, sick pay, NIC and etc.
The indiv can split his work and not pay NIC.
Sole trader
Income = sales to customers
Expenses = All costs WHOLLY AND EXCLUSIVELY for the business
Profit = what’s left. This is taxed.
Wholly and Exclusively?
All costs incurred in order to generate income are allowable.
Nature of sole trader though might complicate things.
Wholly and exclusively resolves any complication as far as HMRC are concerned.
Dual purpose (personal AND business) is not wholly or exclusively, so not allowable.
How to calc TAX for indv with self-employment and employment?
Income tax is calculated on TOTAL income for the year.
Add up ALL employment and self-employment income.
Work out the tax due.
Deduct tax already paid (PAYE on employment income)
Balance is due to HMRC
What savings are TAXED?
Income from investments, (interest received or dividend payments from shares owned) are subject
to taxes but NOT National Insurance.
