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income tax

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A direct tax on an individual's income. In general, individuals can earn income without paying tax up to a threshold, with subsequent income giving rise to tax liabilities, usually at increasing rates as income increases (progressive taxation).

In UK tax legislation income is not defined; rather, amounts received are classified under various headings according to their source (see schedule). In order to be classed as income an amount received must fall underone of these headings. There are some specific occasions when the legislation requires capital receipts to be treated as income for taxation purposes, e.g. when a landlord receives a lump sum on the granting of a lease. In the UK the importance of the distinction between income and capital has diminished since income and capital gains are now charged at essentially the same rate. (Prior to 6 April 1988 capital was charged at 30%, whereas the top rate of income tax was 60%.) The tax is calculated on the taxpayer's taxable income, i.e. gross income less any income tax allowances and deductions. If the allowances and deductions exceed the gross income in a fiscal year, no income tax is payable. In the UK, there are currently two tax-rate bands: a basic rate of income tax of 20% on taxable earnings up to £34,600; and a higher rate of income tax of 40% on taxable earnings over £36,000 (2008–09 figures). The previous starting rate of income tax of 10% was abolished from April 2008. See also PAYE.

Subjects: Social sciencesEconomics

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