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Tax System: The Basics Of The Tax System Explained
A great amount of your income goes straight into the government's pockets. Here is a brief introduction to how the tax system works. Tax collection is the system used by the government to raises money to spend on public services, such as education, health care and the social security system.
We pay indirect contributions on many goods and services in the form of Value Added Tax (VAT) and we also pay the income tax that is deducted from our earnings. We also pay them on a wide range of transactions, including inheritance of property, titles, debts, and obligations, the sale of homes or antiquities. The system is brilliantly complicated and it's no wonder there is an army of experts trying to find the flaws in it for their clients.
There is an old saying that there are only two certainties in life: death and taxes. However, some of them are applicable only to certain people, meaning that you have to earn above a certain level to have to pay the income tax and if you are self-employed you may be qualified to claim back part of your VAT. There are also some non-taxable exemptions, including relief, thresholds and allowances, which can make the system difficult to operate.
PAYE (Pay As You-Earn)
As full-time employees pay their contributions through the PAYE system, meaning that their taxes are deducted at source, so on their paycheck it shows how much money have already been taken out. Taxable income:
- All wages and working income
- Benefits from an employer
- Income from property and rent
- Interest on savings and investments
- Profits from various transactions
When you are a first-time employee, you have to fill in a P46 form, which will notify the tax system that you have enrolled in the work force and you will be given a tax code. Your tax code decides how much money are deducted from your earnings and explain what your allowances for the year are (L means you are eligible for the basic personal allowance) and at what point you start paying taxes. You must know that it is your duty to notify the government that you are earning money and to pay your contribution accordingly.
Self-assessment tax
Self-assessment tax has been introduced by the Revenue during the mid 1990s and reflecting the systems already in place in the US and Australia. The system transfers the administration of tax affairs on to individuals. So, if you're worried that you may have been paying too much tax, the P60 form you receive at the end of the tax year will tell you how much money you earned and what tax you paid.
Taxable income
It is not an excuse to say that you did not know that a certain type of revenue gave rise to a tax liability. Nearly all types of income are qualified for income tax, such as financial earnings from employment (including freelancing), various transactions (including inheritance, share handouts, rent, interest), and other savings.
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