Taxation and VAT
Tax is a financial contribution made to the government. It may be in the form of a reduction such as income tax, which is subtracted from your earnings, or deducted from the interest made on savings.
It can also be added to the cost of an item such as VATValue-added tax. A government tax added to the cost of most goods and services. As of 2015 the usual rate is 20%, while a reduced rate of 5% is charged on some goods and services, eg home energy. , which is added to the cost of most things bought or stamp duty, paid when you buy a house.
Income tax
Income tax is the tax people pay on the money they earn. Typically, the first portion of income isn鈥檛 taxed. This is called your personal allowance.
The rest of your salary above your allowance is called taxable income. This is the money your income tax is calculated on.
Up to a given value of your taxable income will be charged at a basic rate of tax (20%) and money over this will be subject to a higher rate of tax (40%).
Calculating income tax
Geraint earns 拢75,000. We can calculate the amount of tax he has to pay and how much his income will actually be, given the following information:
- Personal allowance of 拢10,000
- Basic rate of 20% for actual income between 拢10,000 - 拢41,785, or in other words, the first 拢31,785 of his taxable income
- Higher rate of 40% for taxable income between 拢31,785- 拢150,000
1. Begin by subtracting 拢10,000 as this will not be taxed:
拢75,000 - 拢10,000 = 拢65,000 of taxable income
2. The first 拢31,785 will be taxed at 20%.
拢31,785 梅 100 脳 20 = 拢6,357 tax.
3. Calculate how much is left to be taxed - this will be at a rate of 40%.
拢65,000 - 拢31,785 = 拢33,215 to be taxed at 40%.
拢33,215 梅 100 脳 40 = 拢13,286 tax.
4. Add up both values of tax:
拢6,357 + 拢13,286 = 拢19,643 total tax.
5. Subtract this from his earnings to find how much income he will receive after tax.
拢75,000 - 拢19,643 = 拢55,357.
Question
Marcus has an annual salary of 拢22,500. He receives a personal allowance of 拢10,000. He pays a basic rate of 20% on taxable income between 拢0 and 拢31,000 and a higher rate of 40% on taxable income between 拢31,000 and 拢140,000. Calculate how much he is taxed and what his actual income is.
拢10,000 = personal allowance.
拢22,500 - 拢10,000 = 拢12,500 taxable income.
This is below 拢31,000 so he only has to pay 20% tax on the remaining balance.
拢12,500 梅 100 脳 20 = 拢2,500 tax.
拢22,500 鈥 拢2,500 = 拢20,000 income after tax.
Value-added tax (VAT)
VAT is a tax added to most goods and services. As of September 2011, VAT is charged at 20%.
Calculating VAT
A car costing 拢5,500 is subject to 20% VAT. Work out the cost of the VAT and the total cost of the car.
1. Find 20% of the cost:
拢5,500 梅 100 脳 20 = 拢1,100.
2. Add this to the original cost:
拢5,500 + 拢1,100 = 拢6,600.
Calculating the original cost
Petrol prices are subject to 20% VAT. If I paid 拢48.26 for a tank of petrol, how much of this was VAT?
Cost + VAT = price paid
100% + 20% = 120%
拢48.26 = 120%.
Divide both sides by 120 to find the value of 1%.
0.4021666667 = 1%.
Now multiply by 20 to find the value of VAT added.
8.043333333 = 20%.
VAT = 拢8.04 (rounded to two decimal places as we are dealing with money).