4.5.2

• Direct taxes

  • Direct taxation is levied on income, wealth and profit
  • Direct taxes include income tax, inheritance tax, national insurance contributions, capital gains tax, and corporation tax (a tax on business profits)
  • The burden of a direct tax cannot be passed on to someone else
• Indirect taxes

  • Indirect taxes are usually taxes on spending
  • Examples of indirect taxes include excise duties on fuel, cigarettes and alcohol and Value Added Tax (VAT) on many different goods and services together with the sugar tax
  • Producers may be able to pass on an indirect tax - depending on price elasticity of demand and supply
• What are progressive taxes?

  • With a progressive tax, the marginal rate of tax (MRT) rises as income rises
  • As people earn more, the rate of tax on each extra pound goes up. This increases the average rate of tax.
  • Income tax in the UK is a progressive tax: Income tax on earned income is charged at three rates: the basic rate, the higher rate and the additional rate.
• Personal tax allowance (zero tax) up to £12,570
• Basic rate taxed on taxable income between £12,570 and £50,270
• Higher tax taxed on taxable income between £50,271 and £150,000
• Additional 45% marginal tax rate on any taxable income in excess of £150,000
• What are regressive taxes?

  With a regressive tax, the rate of tax paid falls as incomes rise - i.e. the average rate of tax is lower for people on higher incomes. E.g. duties on tobacco and alcohol.

  A tax is said to be regressive when low income earners pay a higher proportion or percentage of their income in tax than high income earners