Tax 101: Understanding what, how and why you payVirtually everything around us is funded by taxes.
From the schools to the parks and from the roads to the municipal buildings, all public works rely on taxation to run correctly.
The next time you're at the airport, opening the tap to get some water, enjoying a stroll in the public square or even turning on the TV, keep in mind that paying taxes made all of it possible in the first place.
However, there's also a certain aura of mystery around them.
Many are often confused about where their tax money goes and how it will be used.
Some are also apprehensive about the process, afraid they might make a mistake and commit something akin to fraud or tax evasion.
If you're young and struggling to understand the process, there's no need to worry.
It might seem like a handful initially, but the process is relatively straightforward when you understand the basics.
Here's what you need to know.
What are taxes?Simply put, taxes are mandatory contributions that both individuals and corporations owe.
They are levied by governmental entities, both regional and national.
We've already outlined the fact that these revenues are used in the financing of public works, including programs such as social security and health insurance.
Taxes fall on whoever pays the burden of the tax.
From an accounting perspective, they are split into several other categories, including income, payroll and sales taxes.
One thing almost all types of taxes have in common, however, is that taxation is applied as a percentage of monetary exchange.
This includes various situations, such as after the completion of a particular transaction or when income is earned.
One notable exception is property tax, applied based on the value of a held asset.
Understanding taxesWell, you might say, that's all well and good, but what's the point of knowing all this information and learning the intricacies of the taxation system?
After all, all you need to do is complete some official tax returns when you need them.
In the case of employment taxes, for example, you're not even required to submit an official form, as your taxes will be automatically deducted from your wages.
The only exception to this rule will be if you have an income situation that's a little complicated.
For instance, you might have an additional source of income that hasn't been taxed yet.
In this situation, you must fill in a little extra paperwork.
However, it is a little more complicated than that.
Taxation is one of the main components of the social contract between you, as a citizen, and the economy.
In a sense, it is also part of your civic duty to be knowledgeable about public affairs and be involved in your community.
Knowing how taxes work enables you to hold our administration accountable for their choices, which in turn contributes to better financial management.
Taxes require a percentage of your revenue to be remitted to the government.
It is a compulsory tax, and failure to comply is classified as tax evasion.
This felony is punishable by law.
In the UK, you are eligible to spend up to seven years in prison for deliberately ignoring your taxes.
The amount you might pay in fines is unlimited.
Most countries use the services of a specialised department for tax collection.
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Types of taxesOne of the essential parts of understanding how taxes work is making sense of the many different types of taxes.
The most important include:
- Income tax: The most well-known example and most likely the first thing you have in mind when thinking about taxation efforts.
This tax refers to a percentage of your generated income that is relinquished to the state.
- Corporate tax: Much like an income tax, only used for businesses.
A part of the profits returns to government bodies.
As of Spring 2021, in the UK, this tax increased by 25% for profits exceeding £250,000.
In the case of enterprises with profits of £50,000 or less, the rate stands at 19%.
- Property tax: Known in the UK as the Stamp Duty Land Tax, this value is based on the overall value of your property and lands.
It only applies to properties exceeding £250,000 in value.
Between £250,001 and £925,000, you are eligible to pay 5%.
The price doubles for the portion that reaches £1.5 million, and the remaining amount, meaning citizens with properties exceeding this value pay 12%.
- Sales tax: VAT is a tax you pay on virtually all goods and services.
Since early January 2011, the standard rates have increased by 20%.
You have the option to check the rates on several products online.
- Tariff tax: This tax refers to the amount you pay for imported goods.
These prices usually include cost, insurance, duty and freight.
That's why it's important to study local tax laws before moving to a foreign country.
It can save you a lot of trouble in the long run.
Understanding the triggers behind taxes enables you to make sounder financial decisions that can benefit your personal budget.
At the same time, it also provides you with a clearer picture of how your money helps support the community you inhabit.
And that's how you feel like an integral part of society.
Note: The information in this site is for general guidance only. Users of this site are advised to take professional advice before taking practical tax decisions.
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