Celebrate: it's Tax Freedom Day
Sunday 31 May is Tax Freedom Day 2010 and before Chancellor George Osborne brings in a set of tax hikes, it's time to have a celebration.
However, this year's Tax Freedom Day falls three days later than last year's due to the reintroduction of the 17.5% VAT rate, according to an study by the Adam Smith Institute (ASI).
Since 1991, the think tank has been working out the first day each year that the average Briton starts working for themselves rather than the taxman.
It does this by working out the proportion of net national income used to pay the total government tax revenue - this year it works out at 40.9%.
The ASI then convert this into the number of days in the year it would take to pay your tax if you did it up front. From this day forward, the rest of your salary for the year would be tax free.
The rise of VAT, which came into effect from 1 January this year, was responsible for pushing forward Tax Freedom Day by one and a half days alone.
But ASI's executive director Tom Clougherty, warns that in future years Tax Freedom Day could be even later:
"Since all budget deficits eventually have to be financed, borrowing should be viewed as deferred taxation. Our government relies so much on debt to fund their spending, that our traditional Tax Freedom Day measure makes them look more virtuous than they actually are. In reality, all they are doing is piling up obligations on future taxpayers," he says.
Income tax presents the biggest tax burden on for taxpayers. In 2010 they will have to pay 41 days to pay it off. A further 27 days is taken to pay off national insurance contributions, and 21 to pay VAT.
5 ways to cut your tax bill:
1. Make sure you are paying the right amount of income tax - check your tax code is correct because it determines how much income tax you pay.
2. If you're a saver, open a cash individual savings account - from 10 April everyone can put £5,100 into a cash ISA, which works just like a savings account but interest is tax-free.
4. Think about inheritance tax planning if your estate amounts to more than £325,000 - for example, each year you can take advantage of IHT-exempt gifts. For a full breakdown look at the HM Revenue & Customs website.
5. Use your CGT allowance - if you make a profit on assets, you currently have a threshold of £10,100, which is exempt from CGT. Anything beyond that is taxed at 18% but this could be changing in the emergency Budget so be sure to use your allowance sooner rather than later.
Used by an employer or pension provider to calculate the amount of tax to deduct from pay or pension. A tax code is usually made up of several numbers followed by a letter. If you replace the letter in your tax code with ‘9’ you will get the total amount of income you can earn in a year before paying tax, for example 747L would mean a person could earn up to £7,479 before paying tax. The wrong tax code could mean a person ends up paying too much or too little tax.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.