Covid19: Tax Hikes and what you should do?

Written by yasiradnan94
18 August 2020

Tax – Tax has a long history in the UK, going back to the 13th century. Income tax was the first tax levied on people’s earnings in 1799.

Tax can be used by governments to affect:

1. Inflation – Higher tax levels should have the effect of decreasing inflation

2. Employment – Higher tax levels should increase employment (if spent by governments in the right way!)

Taxation is also used by governments to affect businesses and individuals:

·       It encourages saving by offering ISAs (individual savings accounts) and tax relief for contributions to pensions

·       It encourages charitable donations by offering Gift Aid tax relief

·       It encourages new businesses by offering investment tax relief

·       It discourages motoring (causing air pollution) by fuel duties

·       It discourages drinking alcohol/smoking by imposing high duties etc

Social Justice Purpose

The social justice purpose of taxation can be achieved through progressive taxation.

This simply means the higher earners pay a higher % of their income as taxes – thus redistributing the wealth in society from the rich to the poor. Income tax is an example of a progressive tax. The opposite of this is Regressive taxation where higher earners pay a lower % of their earnings as tax.

Ad Valorem Principle – Here everyone pays the same % of tax regardless of income – e.g., VAT on a computer is the same regardless of your income

The final form of tax is Proportional Taxation This is where the tax levels (% of earnings) remain the same regardless of income levels.

Covid19

We can reasonably expect tax hikes as a result of the current economic crises due to the coronavirus pandemic. The Tories “triple tax lock” promise before the election was to not raise income tax, national insurance or VAT. Recent reports of the budget deficit is in the region of £340bn and this makes changes across the board inevitable. It is anticipated a 1% rise in the basic rate of income tax to 21% (from 20%) would raise £5bn. For the self-employed it is a time to conduct a full business review. Are you running your enterprise in the most tax efficient way possible? Are you deriving the benefits of cloud accounting software? If not, this is a great time to take a step back and review procedures and processes given the forthcoming likely tax hikes, which will impact one and all on the back of already unprecedented circumstances.

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