Taxation Report for Economics Course

This report discusses the Finance Act and its implications for taxation in the UK, focusing on key changes introduced in the Finance Bill 2015-16, their impact on low-income families, and the overall function of taxation in a modern economy. It highlights various sources of tax revenue, including income tax, national insurance, VAT, and corporation tax, while also addressing the purpose of taxation in financing government spending and reducing economic inequality.

TAXATION

TABLE OF CONTENTS
Introduction..........................................................................................................................................
1) Finance Act and the source of Revenue Law in UK...............................................................1
2) Two key changes for Income Tax in the Finance Bill 2015-16 and its impact on low income
families.........................................................................................................................................3
3) Function and purpose of taxation in a modern economy........................................................4
References............................................................................................................................................

LIST OF FIGURES
Figure 1: Tax Revenue Sources of UK 2015-16.............................................................................2

INTRODUCTION
Finance Act is passed each year incorporating proposals set out in the Budget. The
Finance Bill enacts the proposals for taxation made by the Chancellor of the Exchequer in his
Budget statement and brings them into law. The Summer Budget of 8 July 2015 introduced a
number of important tax measures which will impact individuals and businesses (Dowell, 2013).
Herein, researcher present function and purpose of taxation in context to income tax.
1) Finance Act and the source of Revenue Law in UK
In general, finance act can be defined as the headline fiscal legislation that is enacted by
the Parliament of UK, which consist of several provision relating to taxes, duties, exemptions
and setting of principal tax rates for fiscal year. In UK, the Chancellor of the Exchequer delivers
the budget speech on the budget day. The main purpose of this speech is to outline all the
changes in spending, tax and duty (Finance Bill, 2015). However, all the modifications in tax
and duty are passed as law each year in the form of Finance Act. Further, finance act are
common and are result of change in governing party due to general election.
In addition to it, rules of governing the different taxation methods consist of relevant
taxation acts. However, capital gains tax legislation consist of Taxation of Chargeable Gains Act
1992. The Finance Act of UK consist of detailed information regarding amendments on different
taxes such as Excise Duties, Value Added Tax, Income Tax, Corporation Tax and Capital Gains
Tax. In particular with the income tax which is imposed by government of UK on individual or
business named as taxpayer that varies from income or profits of the taxpayer (Drautzburg and
Uhlig, 2015). However, the rate of income tax is defined in the finance act during the budget
speech by the chancellor.
Sources of Revenue Law in UK:
There are several sources from which UK generates its tax revenue such as:
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Income Tax; 204.6
National Insurance; 125.7
VAT; 117
Corporation Tax; 55
Concil Tax; 31.2
Excise Duties; 21.9
Tax Revenue (£ Billion)
Figure 1: Tax Revenue Sources of UK 2015-16
 Income tax: Income tax which is imposed by government of UK on individual or business
named as taxpayer that varies from income or profits of the taxpayer. However, the rate
of income tax is defined in the finance act during the budget speech by the chancellor
which in 2015-16 is 20% one of the prominent source of revenue for UK as it contributed
204.6 billion in 2015-16 (Finance Act, 2015).
 National Insurance: It refers to the system of contribution paid by the workers and
employers towards the costs of certain state benefits. However, this legislation was
introduced by National Insurance Act 1911 and expanded by Labour government in
1948. The main purpose for an individual or entity to pay national contribution is to
qualify for certain benefits that consist of State Pension. Eligibility criteria of paying
national insurance is:
- If individual is over 16
- Employee earning more than £155 a week.
- Self-employed and making profit of £5965/year (National Insurance, 2016).
 VAT: These are the value added tax on goods and services and it charged at the rate of
20%. However, the revenue UK generated from VAT is £117 billion in 2013-14 (Farhi
and Werning, 2013).
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 Corporation tax: This is the tax that is levied by the government on those companies who
generates profits as well as on the profits of permanent establishments of non-UK
residents companies and associations that trade in European Union (Corporation Tax
rates and reliefs, 2016). The rate of corporate tax in UK is 21% and from which
government of country generated £55 billion in 2013-14 (Pettinger, 2014).
 Council Tax: It is a type of tax that is collected by local authority on the domestic
property. Furthermore, government of UK generated tax revenue of £31.2 billion in
2015-16 (Council Tax, 2016).
 Excise duties: These are the inland duties levied on articles at the time of their
manufacture which consist of duties related to Alcoholic liquor, Hydrocarbon Oil duty,
Tobacco products duty, Gaming duty, Amusement Machine Licence duty and vehicle
excise duty etc. from this tax UK generated the revenue of £21.9 billion in 2015-16
(Johnson, McLaughlin and Haueter, 2015).
2) Two key changes for Income Tax in the Finance Bill 2015-16 and its impact on low income
families
On 15th July 2015, Government of UK published its Summer Finance Bill, with the aim
of introducing number of provision which were announced by the Chancellor. The two key
changes that Chancellor announced in context to income tax were:
 Finance Act 2014 provide that from 2015-16 there are two personal allowances available
by reference to an individual’s date of birth: one for those born after 5th April 1938 and
one for those born before 6the April 1938. Further, it also set the amount of personal
allowance for those born after 5th April 1938 at £10500 for 2015-16 which clause
increases to £10600.
 With the effect from 6th April 2016, the government of UK will restrict pension’s tax
relief for higher earners using a tempering mechanism (Butler and Arnett, 2015).
These are the two major changes that took place in finance bill 2015, the main purpose of
these changes is to provide support to the low level income people so that they can generate
more personal allowance and enhance their living of standard.
Explanatory Notes:
Taxation of pensions at death:
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As announced in the summer finance bill 2014, the tax rate that applies on certain lump
sums paid on death will be amended form 6th April 2016. However, tax on lump sum paid in
respect of individual who died aged 75 and over will be payable at the recipients marginal rate
from tax year 2016-17. Furthermore, lump sum death benefits can be paid free of tax from a
registered pension scheme if the individual is under the age of 75 years when they died. In this
regard, lump sum amount is provided within the two years of the scheme administrator (trustees)
becoming aware of the death, subject to certain limited exceptions.
In addition to it, a tax charge of 45% currently applies in respect to the lump sum death
benefits where the person dies over the age of 75 years. But from the basis of change in
legislation of income tax, tax will be payable at the recipient’s marginal tax rate and this will be
amended from 6th April 2016. However, despite of this there will be certain circumstances where
45% tax rate will be charged such as:
 Recipient is not an individual.
 Lump sum is payable to individual in their capacity as trustee
 Partner in partnership firm or a company director.
In these situations, lump sum amount will be taxed as pension income.
Tapered Annual Allowance:
According to the legislation, for every £2 of adjusted over £150000 an individual earns,
that individual’s annual allowance will be reduced by £1. However, the maximum reduction will
be £30000 so that individual having the income of £210000 or above will have annual allowance
of just £10000 (Finance Bill, 2015).
By the means of both the changes, low income families will be affected positively as the
increase in personal allowance of £100 will assist in raising the spending power of the from £30
to £50. This indeed will encourage the low income people to live more happy life (Butler and
Arnett, 2015). Further, reduction in annual allowance of high income people will provide the
change to get better annual allowance to the low income families so that they can carry out their
routine work in more effective and efficient manner.
3) Function and purpose of taxation in a modern economy
In general, taxation refers to imposition of compulsory levies on the individuals or
entities by the government of UK. However, taxes are charged in almost every country of the
world with the aim of raising revenue for government expenditure although they serve other
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purpose as well. In other words, tax can be defined as the financial charge or other levy imposed
by the government authority on an individual or a legal entity by a state or a functional
equivalent to state. There are various purpose of taxation which are as follows:
 Financing government spending: The main purpose behind charging tax on people and
entities is to raise funds of the activities that government carry out for the welfare of
society or community (Purpose of Taxation, 2015).
 Reduce gap between rich and poor: According to Finance Act, progressive taxation can
be used to reduce the inequality in the society. In the progressive taxation system, high
income people will have to pay more tax as compared to the low income people which
will leads to contribute in mitigating the gap of rich and poor (Dowell, 2013).
 Reduce consumption of demerit goods: Tax can be used as an effective tool to minimize
the consumption of demerit goods such as alcohol and tobacco (Drautzburg and Uhlig,
2015). Higher the tax more expensive the goods which will force people to minimize the
consumption of such goods.
 Balance of payment: Tariffs are taxes on imports. However, government of UK can
correct an unfavourable balance of payment situation by increasing the tariffs. By the
means of this, import will become expensive and will cause fall in demand of imported
goods.
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REFERENCES
Butler, P. and Arnett, G., 2015. Benefit cuts to hit huge number of children, government figures
show. [Online]. Available through:
<http://www.theguardian.com/society/2015/jul/20/benefit-cuts-to-hit-huge-number-of-
children-government-figures-show/>. [Accessed on 15th April 2016].
Corporation Tax rates and reliefs, 2016. [PDF]. Available through:
<https://www.gov.uk/corporation-tax-rates/rates>. [Accessed on 15th April 2016].
Council Tax, 2016. [PDF]. Available through: <https://www.gov.uk/council-tax/working-out-
your-council-tax>. [Accessed on 15th April 2016].
Dowell, S., 2013. History of Taxation and Taxes in England. Routledge.
Drautzburg, T. and Uhlig, H., 2015. Fiscal stimulus and distortionary taxation. Review of
Economic Dynamics. 18(4). pp.894-920.
Farhi, E. and Werning, I., 2013. Insurance and taxation over the life cycle. The Review of
Economic Studies. 80(2). pp.596-635.
Finance Act, 2015. [PDF]. Available through:
<http://www.legislation.gov.uk/ukpga/2015/11/pdfs/ukpga_20150011_en.pdf>.
[Accessed on 15th April 2016].
Finance Bill, 2015. [PDF]. Available through:
<https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/
385160/Draft_clauses_and_explanatory_notes_for_Finance_Bill_2015.pdf>. [Accessed
on 15th April 2016].
Johnson, C.J., McLaughlin, J. and Haueter, E.S., 2015. Corporate finance and the securities
laws. Wolters Kluwer Law & Business.
National Insurance, 2016. [PDF]. Available through:
<https://www.gov.uk/national-insurance/overview>. [Accessed on 15th April 2016].
Pettinger, T., 2014. Tax revenue sources in UK. [Online]. Available through:
<http://www.economicshelp.org/blog/4001/economics/tax-revenue-sources-in-uk/>.
[Accessed on 15th April 2016].
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Purpose of Taxation, 2015. [Online]. Available through: <http://www.dineshbakshi.com/igcse-
gcse-economics/role-of-government-in-an-economy/revision-notes/1310-taxation-
purpose-of-taxation/>. [Accessed on 15th April 2016].
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