What is a Direct Tax?

What is a Direct Tax?

What Is a Direct Tax? A direct tax is paid by the individual or business directly to the government the key point is that the charge of a direct tax cannot be passed on to somebody else and this is different to finding ways to legally avoid or illegally evade tax but crucially the tax liability is yours and yours to pay and their Lilly almost taxes on income including corporate profits and also wealth .

now here are five examples of direct taxes in the UK income tax which we’ll go through in a second corporation tax attacks on business profits capital gains tax this is a tax on the profit that when you sell or dispose of something that is an asset perhaps my shares that they’ll have increased in value and that’s insurance is paid on income by the employee and the employer and inheritance tax or IHT is paid in case of the estate of a person is worth more than a threshold level when they die income tax in the UK is an important idea this is how income tax works in terms of the marginal tax rate rising with income o so you all have a tax allowance of 12,500 pounds and then beyond that you start paying tax at 20% 40% 45% the marginal tax rate is the tax on the next one pound of income that you earn

so let’s take somebody on thirty five thousand pounds a year they would be paying no tax on the first twelve thousand five hundred then the next twenty-two thousand five hundred is taxed at 20% so they would pay four thousand nine hundred and fifty pounds in tax that’s someone double the income or they would pay no tax on the first twelve thousand five hundred they’d then use the whole of that little next bit they use at the whole up to fifty thousand pounds a 20% of 37,500 which if my math is correct is 7,500 they’ve still got 20,000 pounds of taxable income left so they’d play that at 40 percent which is 8,000 pounds in total they pay fifteen thousand pounds five hundred and finally look at somebody earning a lot of money four thousand pounds a week two hundred thousand pounds a year again no tax on the first twelve twelve thousand five hundred although in fact, they would lose that allowance technically but for this purpose of this video they don’t pay tax in the first twelve thousand five hundred then they pay all thirty-two thousand thirty-seven five five hundred twenty percent the next one hundred thousand pounds they used up again they pay that at forty percent if still got fifty thousand pounds above one thousand one hundred fifty thousand so what fifty thousand pounds to pay at forty-five percent so you can see here that they weren’t they’re spending a lot of money on tax here and totally but they’re gonna spend seventy thousand pounds on tax let’s see how these figures add up so the person on thirty five thousand pounds a year pays four thousand one hundred and fifty that’s an average tax rate of 14.1% double the income to seventy thousand pounds they pay fifteen thousand five hundred thinking in income tax that’s an average tax rate just dividing one by the other of 22 percent somebody up two hundred thousand pounds a year pays seventy thousand pounds a year in income tax again divided seventy by 200 that gives an average tax rate of thirty-five percent in other words with a progressive tax which income tax is the average rate of tax goes up with income these three example calculations show that income tax in the UK is progressive in other words those people on higher incomes pay a bigger percentage of their income in tax here are the five big direct taxes we’ve mentioned today and income tax brings in just under two billion pounds a year that’s insurance not far behind those two four the bulk of the income from direct taxes in third place corporation tax just under 60 billion pounds you mean there was more than a billion pounds a week in tax on business profits actually for all the media coverage of capital gains tax for the Harrisons tax they don’t actually bring in much in the form of revenue compared to those big three leading direct taxes I just want to show you a couple of slides to finish with from the Institute of Fiscal Studies.

chart_direct_tax

this chart shows direct personal taxes that’s income tax and thus insurance as a share of GDP compared to all the other taxes including indirect taxes and you can see that in the UK on the left hand side they’re direct personal taxes bring in just under half of the total tax revenue for the government as well this’ll be locally compared to the OECD average and notice to how in Scandinavia Sweden and Denmark and those countries the tax burden is much higher gently compared to contrast with the United States but the ratio between direct personal taxes and all other taxes is significantly higher those countries have very progressive income tax systems and this chart just gives you an illustration a nice visual illustration for understanding the concept of the marginal tax rate applied to extra income so you have your tax-free allowance then that’s insurance kicks in then the basic rate kicks in and the higher tax rate says your income goes up you become liable to pay a higher marginal tax rate on income note the spike in the highest marginal tax rate because there’s annual gross income rises above about 100 thousand pounds a year then the income tax-free allowance is gradually withdrawn which means effectively those people are paying a tax rate of over 60% on earned income above a hundred thousand pounds a year but it gives a nice feel for the marginal tax rate.