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What is taxation?

Taxation definition

Tax is the financial contribution a government takes from an individual or a business to pay their share of money needed to provide state services or facilities like pensions, schools and hospitals. The money can be raised in different ways such as a percentage of profit or income, or an extra sum added on to any purchase you make – including buying land, property and shares.

Where have you heard about taxation?

In many countries, if you are in paid employment you'll see how much tax has been taken from your earnings on your pay slip. In some places, you'll also see how much tax you have been charged on your purchases – perhaps on the shelf or on your receipt. Estimates for work may also include tax as a separate additional item.

When governments are setting their budgets you'll also hear about changes to tax rates in the news. There have recently been many rows about where digital and international businesses like Google, Starbucks and Amazon should pay the taxes on their profits – for example this story in the UK's Independent newspaper Six British multinationals 'did not pay any UK corporation tax in 2014'.

What you need to know about taxation.

Benjamin Franklin wrote in a letter in 1789 that "in this world nothing can be said to be certain, except death and taxes". Where taxation systems are in place, paying tax is compulsory and deliberately not paying up is generally a criminal offence. Most countries adopt a cradle to the grave view of paying taxes – so if a child earns enough to put them over the tax threshold then they will need to pay tax – although special rules may apply.

A few oil-rich countries such as Qatar, Saudi Arabia, Kuwait and Oman don't levy income taxes – but their citizens are expected to contribute towards social security benefits. Most governments impose taxes in a variety of ways - on earnings, profits, spending, import duties for example.

Tax systems can be complex. In order to encourage some kinds of behaviour governments will offer some kinds of tax allowances – so for example, if a business invests money in Research & Development they may be able to offset some of the money they have spent against the tax they have to pay on profits. Likewise, governments may tax cigarettes, alcohol and gambling quite highly to discourage people from too much of a good thing.

Once a tax regime is put in place you can be sure an army of tax experts and accountants will try to find any legal loopholes in the system so their clients can minimise or avoid paying the tax.

Find out more about taxation.

See more on Capital Gains Tax.

Discover how to work out a marginal tax rate.

See what constitutes a tax risk.

Every year the UK government's tax department HMRC publishes a list of the most unusual excuses for not completing their tax return. See the 2016 excuses.

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