United Kingdom Tax System Overview


Taxation can be described as the way by which governments finance their spending by imposing charges on individuals and companies. Most nations use taxation to encourage and discourage economic decisions (Smith, 2006). For instance, taxation on personal income in terms of the amount paid as interest on mortgage leads to construction activities, which create jobs. It is a system of raising revenue by the state. It applies to all types of taxes, from corporate tax to gift tax. Different countries adopt different types of tax systems, in order to finance their expenditures. There are various types of taxes that can be levied to individuals or companies (Melville, 2011). The most common form of taxation includes corporate income tax, personal income tax; value added tax, property tax and sales tax. Economist Adam Smith developed various principles or cannons of taxation which are important in public finance. Most tax systems in various countries are developed in accordance to these cannons. These principles include cannon of equality or ability, cannon of certainty, cannon of convenience and the cannon of economy. We are going to discuss the cannon of equality in United Kingdom tax system, in this report (Williams, 2011).

Taxation in United Kingdom

The cannon of equality is a very important taxation principle. It does not imply that people should pay an equal amount of tax, but they should pay taxes according to their incomes. Progressive system implies that the rate of taxation should rise with a rise in income and decrease with a decrease in income. Adam Smith argues that, every person should contribute towards the support of government according to his proportion of revenue. Taxation in United Kingdom involves the amount of charges imposed on people and corporations by the central government and the local government (Lymer, 2010). Taxes imposed by central government, includes income tax, value added tax, corporation tax, national insurance contributions and fuel duty. Local government taxes include business rates charged in England and Wales, council tax and other fees such as street parking. Income tax is charged at the rate of 50% in the United Kingdom. Several economists have warned that this rate makes United Kingdom one of the highest tax regimes in the world. According to these economists, the high tax rate prevents foreign investors and talented works from United Kingdom. They have urged the government to reduce the tax rate in order to stimulate economic development (James, 2009). In 1990s, United Kingdom had a low deregulated economy, but this has changed over time. According to the research conducted by the world economic forum, United Kingdom’s tax system was among the fifth most competitive in the world. Today its tax system, is ranked 94th which is below Lesotho, Swaziland and Iran. The proportion of the amount of tax paid by the top earners increased as tax rates decreased. When the tax rate was reduced to 40%, a quarter of income tax revenues were derived from the top 1% of earners. This was because of rising incomes, although most tax revenues were derived from a small number of overpaid bankers and executives. This indicates that United Kingdom tax system is a progressive system which obeys the cannon of equality.

The United Kingdom tax system includes high tax allowance for the low paid employees. This enhances the development of infrastructures which ensures equitable distribution of resources (James, 2010). People who earn huge salaries and companies making a lot of revenue are over taxed and over regulated. The income derived from taxing these people is used to develop public amenities hence equitable distribution of resources. The 50% income tax rate is charged to income over 150,000 pounds. Income less than 150,000 pounds are charged at a low rate to enhance equality (Williams, 2011). Most of the highest earners are charged 50% making those responsible for the financial crisis to pay the price (Oats, 2006). In Britain, only 275,000 people have an annual income of over 150000 pounds. These are taxed at the rate of 50% which is used for economic development hence equality is achieved. The high income earners pay a lot of money in terms of taxation to finance government projects. According to Sir Stuart rose, the former director of Marks and Spencer the high tax rate on the rich help United Kingdom as a whole. In the United Kingdom, most of income tax revenues are derived from income tax, national insurance contributions and value added tax (Melville, 2011). All these are charged according to the proportion of income earned. This enhances the cannon of equality as people pay tax based on their income ability. In the United Kingdom, income from individuals and corporations are subject to tax. The main taxable income includes revenue from employment and business, income from property, retirement benefits and dividend on shares.

Income from savings product such as national savings certificates and individual savings account is not subjected to income tax (Oats, 2006). In this country income, tax operates through a system of allowances and bands of income. This enhances the principle of equality as described by Adam smith. For instance, taxpayers who are under 65 years receive less personal allowances than older people. The personal allowance is reduced by 50% for every pound of income above 24000 pounds (Ricardo, 2006). It is also reduced by 50% for every pound of income above 110,000 pounds and gradually reducing to zero for incomes above 114,950 pounds. The United Kingdom income tax is a progressive system. This is where taxable is subject to different tax rates depending on the range of income. The first 35,000 pounds are charged tax at the basic rate of 20%. Income between the basic limit of 35,000 pounds and higher limit of 150000 pounds is charged tax at a high rate of 40%. Income above 150,000 pound is charged at a rate of 50%. The cannon or principle of equality is exhibited in the income tax charged by the government of Britain (Thomas, 2011). People with high income taxes are subject to a higher rate of tax as compared to people with low income. Personal allowance is eliminated from high income earners in Britain this shows that the tax system obeys the principles of equality. Savings and dividend incomes are also subject to different tax rates based on the amount of income. Saving income is charged tax at a rate of 20% on the basic rate band. The high rate band is taxed at 40%, and saving income beyond 150000 pounds is charged tax at the rate of 50%. Saving income that falls into the first 2,560 pounds of taxable income is subject to a low rate of 10%. Dividend income is also subject to a different rate of tax.

Dividend income is charged tax at the rate of 10% up to the basic rate limit. It is also charged tax at the rate of 32.5% between the basic rate limit and the additional limit. Dividend income above 150,000 pounds is taxed at the rate 42.5%. The United Kingdom, consists of about 51 million adult population and it is estimated that about 30 million people will be paying tax by 2012. About 4 million of these tax payers will pay tax at a higher rate, providing 35% of total income tax revenue. Around 310,000 tax payers will pay tax at the additional rate, yielding 28.1% of income tax revenue. Most allowances are increased every tax year in the United Kingdom. Individuals giving donations are exempt from paying tax on donations. The pay as you earn tax system in the United Kingdom charges tax to individuals depending on their level of income. Employees with high salaries are charged PAYE tax on a higher rate than those with low income (Daunton, 2010). Working tax credit is offered by the state to support low paid working adults. It is provided to families with children and workers with disability. It consists of a basic element which is worth 1,920 pounds per year. Child tax credit is also provided by the government to support families with children. It is provided to families with at one child under the age of 16. The tax credit is given to people based on their levels of income. Those with higher income receive low tax credit compared to those with low income. This shows that United Kingdom tax system supports the cannon or principle of equality. The government stops providing child tax credit one the family income exceeds 40,000 pounds. It is even planning to reduce the benefits of credit to high income families by withdrawing the credit as soon as the child element is exhausted (Smith, 2006). This means that tax credit will be exhausted once income exceed 23000 pounds for families with one child, about 30,000 pounds for families with 2 children, and around 36,000 pounds for families with three children.

National insurance contributions operate like tax on income but enable a person to contribute to a certain social security. These contributions are based on the level of income. The high income earners contribute more than the low income earners (Smith, 2006). Value added tax is another form of tax levied by the British government. It is a proportional tax levied on all sales. It is a tax on value added to a product at each level of the production process. The standard rate value added tax in Britain is 20%, but a reduced rate has been established by the government. The reduced rate applies to some commodities which are not affordable by the low income earners. These commodities include contraceptives, women sanitary products, children’s car seats, energy saving materials among others. Some goods are exempted from value added tax, and others are zero rated. Excise duties are levied on goods manufactured locally, they are mostly charged on luxury products. Vehicle excise duty is also levied thorough a system of licenses. It is levied on two bands depending on engine size. It is charged at 130 pounds per vehicle for vehicles with an engine of less than 1550cc. Vehicles with an engine size of more than 1500cc are charged at 215 pounds. Air passenger duty is a form of tax charged on air travel from United Kingdom to other countries.

The rate of tax charged is based on the distance between London and other to enhance equality. Climate change levy is imposed on industrial and commercial use of electricity; coal and natural gas. The rate charged varies according to the type of fuel used. In United Kingdom capital gains on the disposal of assets are taxed. Taxable capital gains are taxed at the rate of 18% for basic rate tax payers and 28% for, high additional rate tax payers. This shows that capital tax in the United Kingdom is based on the cannon of equality. Inheritance tax is charged on the transfer of wealth before death. The government set the threshold at 325,000 pounds (Combs, 2010). The inheritance tax is imposed on wealth above threshold at a rate of 40%. The corporation tax is charged at 26% on profits, but the rate is reduced to 20% on profits under 300,000 pounds. Companies with profits between 300,000 and 1,500,000 pounds are subject to a tax relief. Finally, property tax is imposed on buildings in England and Scotland. This is based on assessed market values. There is 25% reduction for properties with only one resident adult and a reduction of 50% if the property is empty. The council tax bill imposed on low income families can be eliminated through claiming council tax benefit. Businesses with a value of 18,000 pounds are charged at a reduced rate of 42.6%. This rate is reduced to 26% for business with value of 12,000 pounds and eliminated for business with a value of less than 6,000 pounds.


Taxation is one of the key policies developed by most governments in the world. It is the major source of revenue to most countries. It enables the resources of a country to be distributed equally among citizens. Most of taxation regimes in the world are based on the cannon of equality as developed by economist Adam Smith. This indicates that people should contribute to the wellbeing of their country according to their abilities. The United Kingdom has one of the largest tax systems. Corporation tax in this country is 50% of the revenue acquired by the company (Ricardo, 2006). The high tax rate has affected the economy of the United Kingdom negatively through discouraging foreign investors. However, the tax regime obeys the cannon or principle of equality; high income earners pay more tax than low income earners.


Combs, A., 2010. Taxation. London: London University Press.

Daunton, M., 2010. The politics of taxation in Britain. London: Oxford University Press.

James, S., 2010. Economics of taxation. New York: Prentice Hall.

James, S., 2009. The principles of taxation. New York: Prentice Hall.

Lymer, A., 2010. Taxation:policy and practice. Chicago: Chicago University Press.

Melville, A., 2011. Taxation. Chicago: Chicago University Press.

Oats, L., 2006. Principles of international taxation. New York: Free Press.

Ricardo, D., 2006. The principles of political economy and taxation. Chicago: Chicago University Press.

Smith, S., 2006. Taxation. New York: Free Press.

Thomas, B., 2011. Personal taxation. London: Oxford University Press.

Williams, S., 2011. Guide to personal tax. London: Oxford University Press.

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