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The UK Tax System

THE UK tax is the most perfect tax system that could be devised. However few members of the public appreciated this. How would you correct their perception?


It has been suggested that over the years, the UK tax system remained the most perfect tax system. However, a few members of the society disagree and raise some arguments against the UK tax system. This essay attempts to prove that the UK tax system is a complete success system and to describe the role and development of taxation in the UK government. It takes a broad overview of the UK Tax system commencing on the historical background of UK tax. Moreover, it will show how the types of main taxes work and examines their actions over the past years. Also it describes the characteristics of a tax system with their benefits and the impact of taxation on behavior the of individuals organizations.

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A brief history of UK Taxation

Before we discuss the historical background of the UK taxation we can define taxes as a compulsory levy, enforced by the government, on income or expenditure. The taxpayer doesn’t receive anything in return. The collection of all taxes in an economy and the rules related to these taxes is referred to as the tax system (Lymer and Oats, 2010/11).

At the beginning of the 20th century tax was paid to UK government by a million people. During the 20th century the public expenditure increased dramatically and nowadays income tax in the UK is paid by the majority of the working population.

In 1944 a new income tax payment method was introduced with the name (PAYE) “pay-as-you-earn”. The monthly wages and salaries were deducted before it was received by the workers. However, the PAYE system was a success, because it has been a significant in the reduction of bad debts. Also the UK government was able to collect any business assets prior to any bankruptcy.

Since April 2005 the UK system is controlled by two Government departments; The Inland Revenue and H.M.Customs and Excise. The Inland Revenue controls the followings parts of tax system: the income tax, corporation tax, capital gains tax, inheritance tax, national insurance contributions, stamps duties, working tax credit and child tax credit, child benefit and other taxes like student loan repayments.

However, one of the most significant events in the recent history of UK is that the Inland Revenue and H.M Customs and Excise consolidated into a single body. Since April 2005 they are collectively called Her Majesty’s Revenue and Customs (HMRC) having a common management structure for both departments. This consolidation results bring UK government in line with other developed countries. As it can be seen in the past years, the UK taxation is changing year per year with new taxes.

Tax year:

In 18th century the UK government used an accounting year which ended on Lady Day but this later was changed from 25 March to 11 of April. So since today a tax year runs from 6 April 2010 to 5 April 2011(Lymer and Oats, 2010/11).

Tax System:

Income Tax

Income Tax is a tax on income. Around 29.5 million individuals pay income tax in the UK. However not all income is taxable. For many years income tax has been the biggest revenue for the UK government. Furthermore each category of income tax has its own rules and policies to decide how much income should be assessed. The Income tax is charged on salaries from employment, on rental income from properties, on interest from the banks and building societies, on dividends from companies and on the profits of the self employed (Download-it, 2010).

Corporation tax

Corporation tax is charged on the profit of UK companies. From 1965 corporation tax became a separated tax of the tax system. Firms not resident in the UK pay corporation tax only on their UK profits. The profits of corporation tax is charged are from income trading, investment and capital gains.

VAT(Value added tax)

Since 1973 VAT has became one of the main sources of income in UK government. VAT is tax which is paid on all sales. The treasury expects to raise £60.7billion from VAT in the fiscal year 2010/2011. The standard rate of VAT is 17.5% (Lymer and Oats, 2010/11).

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Capital Taxes

They were introduced in 1965 which increased in wealth through the growth of capital value but removed from the development of capital gain tax .Capital gains tax is the tax collected when the sale of assets make a profit. For example when you dispose an asset and after a few years you sell it or transfer it (HMRC, 2010).

Characteristics of Tax system:

In modern terms, Adam Smith’s desirable the characteristics for a tax system that have been changed and re-stated as equity, certainty, convenience and efficiency. Equity is characteristic which is an important elector for any tax system as the government needs people to pay taxes on a fair basis. Next is the certainty characteristic which is a good feature of the tax system design. The reason is because the taxpayers know when and who they have to pay the taxes in tax system. Next for convenience, the characteristic is that people know how to pay their liabilities to the government. Efficiency is divided by economic and administrative efficiency (Lymer and Oats, 2010/11).

The benefits principle for UK tax

The UK government is designed to allow for those who enjoy most of the social benefits derived from taxation to pay the higher amount of taxes. Many services cannot be deselected if a person does not want to receive the benefit. However, one of the main benefits that UK tax system provides are the Defense and Law, that citizens are committed to pay. On the other hand, some services that cannot contribute to their costs and are likely when homeowners or businesses can join the fire services at the same time as motorist with roadside assistance agencies. Another example is education. The government produced a benefit for society to pay directly or not the taxes. Under the age of 16, education is free of charge for children in UK.

In the recent history some hypothecated taxes came to surface like vehicle excise duties. The receipt of this tax used for highway construction and maintenance. Furthermore another example is the TV licence fee. Every citizen in UK who has TV must pay tax. People are willing to pay health care. An important measure of benefit of hypothecated taxes is the National Health Service. As we can see there a lot of important services of taxes that offer benefit to UK government for the future.

A progressive tax must have two rates of tax. Progressive tax is when the government takes a larger percentage tax from the income of high-income people than from low-income people. However, income tax is progressive and a good example is to compare the average rate of tax (ART) with the marginal rate of tax (MRT) from the taxpayer. For instance if the MRT is less than ART then is progressive. In UK the tax is progressive.

Regressivity is when the tax takes a larger percentage from low-income people than from wealthy people. The reason for the regressive VAT because charge at fixed rate 17.5% on the items in UK. So the low income taxpayers spend a higher proportion of their income on VAT than the higher income people. Also another problem in UK government is balance on some policies to reduce the VAT on some items. That is why the VAT is still a regressive tax in UK tax system.


To conclude I believe that UK tax system has a very good system in the most taxes but there are some improvements that could be change in the future. In 21st century the UK tax system could be described as a fair system by the most people who pay the UK taxes. However as every tax system in the world the UK tax system has some taxes which are unfair such as for the TV license fee. I believe that, this tax is not fair for everyone who pay it years ago. Nowadays every household has TV in UK but some people don’t pay the TV license fee which is not fair for those who pay. There is no balance in this tax. On the other hand a progressive tax, like income tax is fair and logical to everyone. It is clear that the UK system has a progressive system on income tax as we discuss before. This is an important aspect for taxpayers especially for the low-income people. The lower income people pay low tax and higher income pay higher tax. This tax is helpful because there is a balance between rich and poor people in UK society. This main tax can describe the UK tax system as an organized and equitable system.

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