The "value added" to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.
Maurice Lauré, Joint Director of the French Tax Authority, the Direction générale des impôts, was first to introduce VAT on April 10, 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses, it was extended over time to include all business sectors. In France, it is the most important source of state finance, accounting for nearly 50% of state revenues.
Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. Value added taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consumers to avoid or evade the tax, but the sales tax offers the buyer a mechanism to avoid or evade the tax—persuade the seller that he (the buyer) is not really an end consumer, and therefore the seller is not legally required to collect it. The burden of determining whether the buyer's motivation is to consume or re-sell is on the seller, but the seller has no direct economic incentive to collect it. The VAT approach gives sellers a direct financial stake in collecting the tax, and eliminates the problematic decision by the seller about whether the buyer is or is not an end consumer.
When to register for UK VAT
If you're unsure about whether to register for VAT, this guide will help to answer many of your questions. It explains when you must register and also when you can register voluntarily, and why you might benefit from voluntary registration.
It also explains:
- the circumstances in which you don't need to register
- the circumstances in which you can't register
- when to register if you do business internationally
Income Tax
Income Tax is a tax on income. Not all income is taxable and you're only taxed on 'taxable income' above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax bill - and in some cases mean you've no tax to pay.What counts as taxable income?
Taxable income includes:
- earnings from employment
- earnings from self-employment
- most pensions income (State, company and personal pensions)
- interest on most savings
- income from shares (dividends)
- rental income
- income paid to you from a trust
Non-taxable income
There are certain sorts of income that you never pay tax on. These include certain benefits, income from tax exempt accounts, Working Tax Credit (WTC) and premium bond wins. These income sources are ignored altogether when working out how much Income Tax you may need to pay.Tax free allowance
Nearly everyone who is resident in the UK for tax purposes receives a 'Personal Allowance', which is an amount of taxable income you're allowed to earn or receive each year tax-free.
This tax year (2011-12) the basic Personal Allowance - or tax-free amount - is £7,475. You may be entitled to a higher Personal Allowance if you're 65 or over.
If you're registered blind, or are unable to perform any work for which eyesight is essential, you can also claim the tax-free Blind Person's Allowance.
Income Tax is only due on taxable income that's above your tax-free allowances.
Allowances and reliefs that can reduce your income tax bill
If you're due to pay Income Tax, there are a number of deductible allowances and reliefs that can reduce your tax bill. These include:
- Married Couple's Allowance - the husband, wife or civil partner has to be born before 6 April 1935
- Maintenance Payment relief - either you or your former spouse or civil partner must have been born before 6 April 1935
Unlike the tax-free allowances, these aren't amounts of income you can receive tax-free. Rather they're amounts that can reduce your tax bill.
Tax on company benefits
If you're employed and you receive non-cash benefits from your employer you will have to pay tax on them.
Taxable benefits
Benefits that you might have to pay tax on include:
- company cars or vans
- fuel provided for your vehicle
- medical insurance
- living accommodation
- loans at low interest rates
How much income tax you pay
After your allowable expenses and any tax-free allowances have been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands.Income Tax rates 2011-12 by tax band and type of income
Because the rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account, if your non-savings income is less than the starting rate for savings limit (£2,560) - or if savings and investments are your only source of income - your savings income will be taxed at the 10 per cent starting rate up to the limit. But if you already have non-savings income which takes you above the starting rate limit, all of your savings will be taxable at the 20 per cent basic rate, the 40 per cent higher rate or the 50% additional rate, depending on your total income.
Remember, the tax band applies to your income after your tax allowances and any reliefs have been taken into account - you're not taxed on all of your income.
'Non savings income' includes income from employment or self-employment, most pension income and rental income.
'Dividends' means income from shares in UK companies.
Savings and dividend income is added to your other taxable income and taxed last. This means you pay tax on these sorts of income based on your highest Income Tax band.
How you pay income tax
Income Tax is collected in different ways depending on the type of income and whether you're employed, self-employed or not working. The different ways Income Tax is collected include:
- PAYE (Pay As You Earn)
- Self Assessment
- tax deducted 'at source' whereby tax is deducted from bank/building society interest at the basic rate before the interest is paid to you
- in some cases, one-off payments
If you're an employee or you receive a company or private pension, your employer or pension provider will deduct tax through PAYE. HM Revenue & Customs (HMRC) may still ask you to complete a Self Assessment tax return if you have complex tax affairs. If you're self-employed, you'll be responsible for filling in a Self Assessment tax return and paying your own tax.
Paying the right amount of income tax
It's important to check that you're paying the right amount of tax. You can do this by checking your:
- total taxable income
- tax-free allowances and reliefs
- current tax code (if relevant)
If you're paying too much tax you can claim this money back. If you’re an employee or you receive a company or personal pension and you think you're paying too little tax you'll need to contact HMRC to change your tax code.
National Insurance Contributions
As well as paying Income Tax on your income, you'll also have to pay National Insurance contributions. National Insurance contributions build up your entitlement to certain social security benefits, including the State Pension. The amount of National Insurance you pay depends on how much you earn and whether you're employed or self-employed. You stop paying National Insurance contributions when you reach retirement age.
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