Limited companies and certain other corporate persons that receive an income have to pay a direct tax called corporation tax on the profits they earn. The rate of this tax in the tax year 2000/81 was 52% of taxable profits, with special provisions for lower rates on profits below a certain figure, whether the profits are made by a small or a large business.
Company profits that are distributed in dividends to shareholders are specially treated. The company must deduct from such dividends an amount equivalent to the basic rate of income tax, so that in the hands of the shareholder, where it becomes part of his total income, the dividend is deemed to have been received 'net of basic-rate income tax'. The tax deducted is paid over by the company to the Inland Revenue which treats it, as far as the company is concerned, as an advance payment of corporation tax. In due course the company will have to make further payments of corporation tax, i.e. 52% minus 30% of gross profits distributed, and 52% of retained profits, assuming the full rate of corporation tax is payable. There are many allowances that can be made out of profits before tax is chargeable, but these need not concern private individuals. (See page 64 for how the dividends are treated for tax in the hand of the shareholders.)
A further direct tax, additional to income tax, is payable by all registered occupiers of land and buildings. This takes the form of payment to the local authority in whose area the property is situated. The payments are called 'rates', and this money is required by the local authorities to finance public services and amenities provided locally. These include education, road maintenance, sewers, fire and police services and many others.
The method of assessing rates is quite different from that used in assessing income tax. The amount due is in proportion not to a person's income but to the value of his house. As a wealthy person is likely to occupy a more valuable property, there is thus a link between rates payable and income, but it is a tenuous one. Rates payable are calculated on what is termed 'rateable value' of the house or land occupied by an owner-occupier or a tenant.
An amount in respect of each employee's tax liability has to be deducted by the employer from each payment of wages or salary. This is called the pay-as-you-earn system (PAYE).
In order to ensure that the PAYE deductions are correct it is up to each employee to inform the Inspector of Taxes for the district in which the employer's business is situated what allowances and reliefs he or she is entitled to. The proper way of doing this is to fill in a return of income form and send it to the Inspector. At the end of each tax year the employer himself has to inform the Inspector of the amounts... see: Pay-as-you-earn