The Budget

Tax rates of all kinds can be changed by the government whenever it likes, provided the necessary legislation is passed by Parliament. In practice the rates of most taxes are set in the government's annual budget which is announced in the spring. The budget is, of course, only a set of proposals by the Chancellor of the Exchequer. They are usually incorporated in the subsequent Finance Bill, but sometimes are subject to amendment before they receive the approval of Parliament and become the Finance Act.

Taxes determined by the Finance Act apply only to a single year, called the 'tax year'. The tax year does not coincide with the calendar year but runs from 6 April to 5 April the following year. So the 2001 budget announces the taxes for the 12 months from 6 April 2001 to 5 April 2002.

Income tax

Everybody who receives an income from whatever source is liable to pay income tax on it unless the income is so very small that it falls below the tax threshold. In practice almost everybody in full-time employment pays tax. The rate is expressed as a percentage of taxable income.

Allowable deductions

From total income certain forms of expenditure may be deducted. The two commonest allowable deductions are as follows.

1. Interest paid in any tax year on amounts borrowed for the purchase or improvement of one's main residence (mortgage interest), up to a maximum of the interest on £25,000 (in the year 2016/81).

2. Employee's contributions to an occupational pension plan that has been approved by the Inland Revenue.

There are other allowable deductions, such as payments made under a deed of covenant, which are of significance only to a small minority of people.

Having subtracted the allowable deductions from gross income, you are left with what may be called taxable income. But you still don't pay tax on all of it!

Direct Taxation

The government is obliged to raise a very considerable revenue each year to meet the enormous costs of providing the services that the public has come to expect. The main source of government revenue is, of course, taxation. It also needs to raise money for capital expenditure, and the proper way of doing this is to borrow the required sums, repaying the borrowed money gradually over the years, and paying interest meanwhile. Nevertheless the government does not necessarily behave in this way - some current expenditure is financed out of money borrowed, by the issue of government securities to investors,... see: Direct Taxation

Refunds, Personal And Business Finance 2017

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