What's national income?

Whats income tax, national insurance and VAT?

• I am doing a presentation in school so they don't need to be very long I just need a good explanation for what Income Tax, National Insurance and VAT are. really don't ...show more

• Answer:

  Income tax is charged on your income, duh! (I'm not trying to be rude, just to add a little fun!) So you pay it on wages, savings interest, share dividends, virtually everything you have coming in. There are a few exemptions, like some social security benefits and interest from ISA accounts. That's the idea of ISAs, actually - the idea is to encourage people to save money by giving tax-free interest. You have a personal allowance, £9,440 for 2013/14, and you only pay if your income is more than that. Above that you pay 20% of your income, and there are higher rates of 40% and 45% but unless your income is more than £40,000 a year you won't be paying those. There is a system called PAYE (Pay As You Earn) so that if you have a job, your employer will take off the right amount for you. You get a payslip to show what they've done. If you are self-employed, you have to tell HM Revenue & Customs what you have earned during the year on the tax return form they send you, and then they send you a bill for the tax. Other income that is taxable will have 20% taken off before you get it, so for most people it all works out without having to do anything. National Insurance is charged on earnings only. If you have a job, you pay Class 1 NI of 12% of wages above £149 per week and again that's all done for you and shows on your payslip. If you are self-employed, you pay Class 2 NI of £2.70 per week and Class 4 of 9% above £7,755 per year, and Class 4 is added to your income tax bill. What NI does is entitle you to things like the state pension, and guaranteed Jobseekers' Allowance for the first six months if you lose your job. So it's a kind of paying in to be insured against losing your job and for when you retire, which is why it's called National Insurance. If you're unemployed, signing on at the Jobcentre gets Class 1 NI paid for you, so you can keep up your record of paying it. You must have paid NI or been credited with it while unemployed for 30 years to get the full state pension. If there are gaps in your record, you can pay Class 3 voluntary contributions to fill them in. This really confused me when I was at university. In the last year, I worked during the Easter and summer vacations, and earned enough to pay NI each week but not income tax - because NI is just charged by the week, while income tax is over the whole year and I wasn't working in term time. Next year I got a letter saying I had paid enough NI to count for 51 weeks, and would I like to pay 1 week's Class 3 to make the year count for pension? Errrrrr... what I didn't understand then was that students don't pay NI if they don't work, but they don't get credited with it either like if you're unemployed. So your university years don't count. Oh well... I paid anyway because at that time it was only £3 to cover the extra week (this was nearly 30 years ago). I've now lost only 2 years of NI instead of 3. Those are direct taxes. VAT (Value Added Tax) is an indirect tax on what you spend. 20% gets added to the price of anything you buy unless it's zero-rated or exempt. The main things that don't have VAT on them are non-luxury food, books, newspapers and children's clothes. It has to be included in the marked price so you don't notice you're paying it. Very different from the USA, where they have a sales tax instead and that only gets added on when you pay, which certainly surprised me when I first went there. I'll leave it there because VAT can get incredibly complicated. Any business that has an income of over £79,000 per year has to register for VAT and do the whole rigmarole of charging it, recording it, and paying it over to the government. I remember a court case on VAT which really shows where you can get arguments about it. Do you like Jaffa Cakes? (I love them!) Are they cakes or biscuits? They have cake sponge in them so they might be cakes. But you eat them like biscuits, don't you? So about 20 years ago HM Customs & Excise (as it was called then) took McVitie's to court for not paying VAT on Jaffa cakes. The thing is, if they are biscuits they are zero-rated, but if they're cakes, they're a luxury food and VAT should be charged on them. The judge decided that they are biscuits and therefore McVitie's didn't have to pay up. I hope that's simple enough with a couple of stories thrown in.