What Everyone Needs to Know about Tax. Hannam James

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      James Hannam

      What Everyone Needs to Know about Tax

What Everyone Needs to Know about TaxAn Introduction to the UK Tax SystemJames Hannam

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      About the author

      James Hannam is a graduate of the universities of Oxford and Cambridge. He has worked as a tax advisor for 20 years at several City of London institutions including KPMG, Barclays Bank and Freshfields. For the last eight years he has been with EY. He lives in Kent with his wife and two children.

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      Introduction

      Why you should read this book

      You pay a lot of tax. Of course, you know that. But I bet you don't know just how much you pay or all the ways the government has to extract the cash from you. I think that's something you really need to know. It will make you into a better-informed voter who can see through the cant of politicians and the distortions in the media. I'm not asking whether we should pay more or less tax. I am saying that, even before we can answer that question, we have to understand about the tax we pay already.

      By the end of this book, I hope you'll also see why with tax, as with so much in life, there are no straightforward solutions. We can't raise huge amounts of money just by taxing high earners and multinational companies, or by closing loopholes and chasing tax evaders. Were it that simple, the government would already be doing it. So, if we want the NHS, state education, a half-decent army and a welfare state, we just have to cough up. No one else is going to do it for us.

      Before we start, an important word of warning: this book is not intended to help you pay less tax. A common version of the UK tax code, containing the law and various pieces of official guidance, is about 24,000 pages long. On top of that, there are at least 82 volumes of court decisions going back to 1875 and reams of material from the UK's tax authority, HM Revenue & Customs (usually abbreviated to HMRC). This book only has about 160 pages and the print is rather larger than in the standard edition of the legislation. That means you should not, under any circumstances, take action in respect of your tax affairs on the strength of what you read in these pages. No really, don't. It would be like attempting cosmetic surgery with only the expertise that you have gleaned from reading The Silence of the Lambs. Whether you are running a large company or living off a modest pension, you owe it to yourself to get some decent tax advice before risking any money. Even when I make some apparently definitive statement in these pages on, for example, ISAs or the VAT treatment of Jaffa Cakes, please don't take it at face value. The UK tax system is so unfeasibly complex, so Byzantine in its intricacy and changes so quickly, that even the simplest rules can have a dozen exceptions. In short, the purpose of this book is to help you become a more knowledgeable taxpayer and voter, not to save you money.

      Income taxes

      Let's look at some of the taxes you pay. If you are a worker, your employer will have been deducting tax and national insurance contributions from your pay packet each month and paying it directly over to the government. There's more: your employer also has to pay national insurance contributions on top of that. That's in addition to the national insurance that you pay. For a worker on an average wage of £26,500 a year, all those taxes comes to almost £8,000 a year: an effective tax rate on earnings of 30 %. You probably know the basic rate of income tax is 20 %, so you might be surprised to hear the effective tax rate for an average voter is rather higher than that, even taking into account the tax-free annual allowance. Of course, this is for workers on £26,500. If you are lucky enough to earn more, your effective tax rate will be even higher.

      The cunning thing is the way the government collects all this tax. You earn the money, but the government diverts its share into the Treasury's coffers before you ever get your hands on a penny. The system of Pay As You Earn (usually abbreviated to PAYE) means you can be taxed without ever feeling it. It's a pernicious regime because it means you don't appreciate just how much you are paying. Imagine if you had to write a cheque to HM Revenue & Customs every month for hundreds of pounds. At the very least, you'd be demanding better value for money from public spending.

      Since the largest element of taxation is on earnings and income, that's what we'll look at in Chapter 1 of this book. We'll be asking whether high earners contribute their fair share and see how tax traps the low paid in poverty.

      Taxes on spending

      Tax doesn't stop there, of course. Once you have what is left of your salary in the bank, you might want to spend it. Most purchases attract Value Added Tax, or VAT.

      Let's combine several taxes into an everyday situation. Your young son has set his heart on a Lego truck for his birthday. There is a big articulated lorry available, guaranteed to flutter the heart of any small boy. The local toyshop would be delighted to sell this Lego set to you for £40, but it's obliged to add 20 % VAT. Unfortunately, you've already had to pay income tax and national insurance on the money you need to pay the shopkeeper. As an average earner, to have the money in your pocket to buy the truck, you need to earn