Introduction
Each and every country has there own set of rules and regulations regarding tax and specific criteria for taxable income. In general, a tax is a financial charge or other levy forced on an individual or an organization by a state or a government. For example, if an individual earns X amount of income a part of it is deducted at source or the individual is entitled to pay a part of his annual income as tax. In the case of a restaurant or any small-scale business, the owner of the restaurant is liable to pay a part of its profit as tax. If an individual has property, he is also supposed to pay a property tax to the government.
There are two basic forms of taxes, direct tax or indirect tax, and may be paid in money or as corvĂ©e labor. In simple terms, tax can be defined is as follows: “pecuniary burden laid upon individuals or property to support the government [ …….] a payment exacted by legislative authority.” (Black’s Law Dictionary 1307) These funds are collected by the state as tax is used for various purposes such as expenditures on the enforcement of the law, protection of property, economic infrastructure such as roads, legal tender, enforcement of contracts, etc., and the operation of government and the political system itself. Besides, public services such as education systems, health care systems, pensions for the elderly, and public transportation, energy, water, and waste management systems are public utilities that are taken care of with these taxes.
Main body
There has been a lot of discussion about what taxable income is and how these are calculated for an individual or an organization. In general, it can be said that taxable income is the portion of an individual’s income that is the subject of taxation according to the laws that determine what is income and the taxation rate for that income. To be more specific, taxable income refers to an individual’s (or organization’s) gross income, adjusted for various deductions allowable by law. The main questions put by most individuals in any jurisdiction are “what makes up my taxable income” and what tax rates should be applied such that I can work out my tax liability to the state. For example, suppose within a year, an individual earned $50,000 from work or restaurant business, made an additional $10,000 profit from selling stock, and won the lottery for $1,00,000. This person has a total income of $1,60,000. However, some of this income may be taxed at a lower rate, or perhaps not taxable at all. In most countries the income taxes of regular salary above a certain limit is taxable. Besides, income from various other sources is also taxable.
National Insurance (NI) is a system of taxes and related social security especially for the United Kingdom and was first introduced as early as 1911. In this system the tax component of taxes paid by employees and employers on weekly earnings and other benefits-in-kind. Additionally, the self-employed for instance a small-scale industry or a business owner are taxed based upon profits. Such taxes are said to be National Insurance Contributions (NICs).
There is a difference between the normal income tax and NIC. Contrasting income tax the limits for class 1 NICs for ordinary employees are calculated on a periodic basis, usually weekly or monthly depending on how the employee is paid and not on an annual basis. On the other hand, those for the higher-level officers or CEOs are always calculated on an annual basis. This is to make sure that the correct levels of NICs are collected irrespective of how often they choose to be pay. The following are the various classes and the percent of taxable income:
- Class 1A: In this group of taxpayers contributions are paid by employers on the value of company cars and other benefits in kind of their employees and directors at the rate of 12.8% of the value of the benefits in kind (from their P11Ds).
- Class 1B: This class was introduced on 6 April 1999 and is payable whenever an employer enters into a PAYE Settlement Agreement for tax. It is important to note that Class 1B NICs are payable by employers and payment does not provide any benefit entitlement for individuals.
- Class 2: All the self-employed come under this group and contributions are fixed weekly amounts. It does not matter if they are under trading profits or losses, they are supposed to pay tax. However, there is a provision for people with fewer earnings to apply for an exception from paying and those on high earnings with liability to either Class 1 or 4 can apply for deferment from paying.
- Class 3: In this group contributions are voluntary NICs paid by people that wish to fill a gap in their contributions record which has arisen either by not working or by their earnings is very less. The primary reason for paying Class 3 NICs is to ensure that a person’s contribution record is preserved for entitlement to the state pension, generally, a person requires either 10 or 11 years for a minimum state pension, even though in certain cases fewer years may be required.
- Class 4: Here contributions are paid by self-employed people as a portion of their profits, calculated with income tax at the end of each financial year, depending on figures supplied on the SA100 tax return (Wikipedia n.pag).
Conclusion
The advantage of the NIC is that people who are not able to work for some reason may be able to claim NIC credits. These are the same as for Class 1 NICs, though are not paid for. The rules for tax payment may vary from country to country. However, it is important to note that each and every individual has to pay the tax and is liable for punishment if they are not paying the tax.
Work cited
- Bryan A. Garner, editor, Black’s Law Dictionary 5th ed., (West Publishing, 1979), pp 1307. ISBN 0-8299-2041-2.
- Wikipedia National Insurance Wikimedia Foundation, Inc., Web.