'Tax' is money collected as a compulsory contribution to state revenue. Its purpose is to finance government expenditure on public services such as health, education, benefits, defence and general upkeep of public areas.
According to research, tax has existed for 2500 to 4500 years - since around the beginning of human civilisation. There are records of taxation systems from all across the ancient world, from China and Persia to Egypt, Greece and Rome.
Tax is undoubtedly an historically controversial subject. Tax resistance can be traced back as far as the introduction of tax itself. It has since caused thousands of years worth of political unrest, from the Jewish Zealot poll tax resistance in 1st century AD, to the tax protests in Romania in 2010.
Every year in the UK, the Chancellor of the Exchequer sets out a budget for the public service costs. This budget determines how much tax is needed for the year. Everyone in the UK is obliged by law to pay tax if they earn above a certain amount.
Despite the complications and controversy that comes with trying to distribute a multi-billion-pound economy across millions of people and thousands of services, the tax system is the key to living in a functioning democracy.
Why do we have to pay tax?
There are a number of reasons why the UK maintains a taxation system. These include:
- Public services funding - Having public goods ensures that services like health care, education and protection remain available to everyone, regardless of their financial position. This has its pros and cons. On the one hand, everyone in the country has access to the same services - such as education, healthcare and security - regardless of how much they earn. On the other hand, paying a fixed rate for these services means people often end up paying for services they never use, or even disagree with.
- Social equality - The tax system ensures that less well-off members of society are supported by better-off members.
- Social and economic welfare - There are wider societal benefits to providing free education, defence and health services. These services are referred to as 'merit goods' because they are profitable for society in the long-run. It helps to produce a healthy, secure and educated society.
- Regulation - Taxation is used by the government as a way of regulating commerce and ensuring that the political, economic, legislative and social policies are adhered to. Having access to individuals' and business's financial information ensures that the government remains in control.
How are taxes levied?
Tax comes from three main sources. These are:
1. Income - E.g. income tax is deducted from employees' wages and employers are obliged to pay corporation tax.
2. Capital - E.g. any source of money owned by an individual can be subject to tax deductions such as Capital Gains Tax (selling of assets), inheritance tax (inheriting money), or Corporation Tax for companies.
3. Consumption - E.g. certain taxes are deducted from products we buy, like value added tax (VAT on everyday purchases), excise duties (on alcohol and tobacco) and fuel duty (on petrol, diesel and LPG).
How is tax fair?
The British government aims to keep the tax system as fair as possible in order to prevent evasion. The happier people are, the less likely they are to evade tax or protest against the system. It is widely thought that a high percentage of tax evasion is the fault of the system, and not of the taxpayer. If tax is too high, the public will revolt. It is therefore essential that the government tries to distribute the money effectively to keep the budget as low as possible in order to keep the public happy.
Currently the government uses a form of taxation known as 'vertical equity'.
Vertical equity means people are taxed according to their financial situation. This means richer individuals are required to pay more than the poorer individuals. This system is based on the idea that the more money someone has, the less of a burden taxation is.
How do I pay tax?
Tax is collected by HM Revenue & Customs, formerly the Inland Revenue. If you are an employee, your employer will deduct the following from your wages using PAYE:
- Income Tax
- National Insurance.
If you are self-employed, you will have to handle your own taxes. If you have employees, it is your responsibility to handle theirs too. Taxes include:
- corporation tax
- capital gains tax
You can either hire an accountant to do all of your accounts for you, or you can do them all yourself. Remember that missing deadlines and making mistakes will cost you money.
Should I hire an accountant to help with my tax?
Although hiring an accountant is not a legal requirement, it could help free up your time to focus on other aspects of your business or life.
If you are the proprietor of a company, you may wish to hire an accountant to organise and record all of your accounts so that they are ready to send to HM Revenue & Customs. From a tax perspective, hiring an accountant could save you money. Accountants will use their expert knowledge to ensure proprietors are only paying what they have to, with no late fees or penalties.
To find out more about how an accountant could help you, or to find the answer to any question you might have, please visit our FAQ page.
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