Pablo:'So the government takes tax from people's salary or wage, which is called income tax. What other types of taxes do I have to pay?'
James:'But it's not just your salary/wage that the government takes income tax from, it's from all of your income or earnings. So if you make money from share dividends or renting a house or from the interest you receive from your savings in the bank, the government takes income tax from those as well.'
Pablo:'Ok. I didn't know that. Are there any other taxes I have to pay from my salary?'
James:'Yes, there is. Here in Britain, the government also taxes your income or salary to pay for your pension and for unemployment benefits (if you are out-of-work) with another tax called national insurance.'
Pablo:'So, apart from my income or salary being taxed, what other taxes do I have to pay?'
James:'You also pay tax when you buy some things (like a computer or DVDs) or use some types of services (like using a taxi or eating in a restaurant). This tax is called value added tax or VAT for short. In Britain, the rate of value added tax is 20%.'
Pablo:'So many taxes. I have also heard about direct taxes. What are those?'
James:'Direct tax is not actually the name of a tax, but a type of tax. Direct taxes are all taxes which comes directly from your income, earnings or you have to pay for owning assets (like owning a house). So, income tax is a type of direct tax, because the government takes money directly from your salary or wage.
Taxes which are added to the price of products or services are called indirect taxes because the tax isn't taken directly from you. With this type of tax, you only pay it when you buy or sell things. An example of an indirect tax is value added tax.'
Pablo:'So for a company, the tax it pays on its profit. Is that a direct or indirect tax?'
James:'The tax on a company's profits is called corporation tax. And because the government takes the tax directly from the company, it's a direct tax.'
Pablo:'Are there any other taxes which companies have to pay?'
James:'Yes, there are. Some companies have to pay a tax for each product or quantity of products they produce to be sold or sell. This tax is called excise duty.'
Pablo:'Why only some companies?'
James:'Because the government only places an excise duty on some types of products. In Britain, there is an excise duty on the sale of tobacco, alcohol and petrol, but not on food, books or clothes.'
Pablo:'But isn't that the same as value added tax?'
James:'It's in addition to value added tax, it's like an extra value added tax on certain products.'
Pablo:'What other types of taxes are there?'
James:'There are lots, but one of the most important is capital gains tax. This is a tax on any profit a person or a company makes from actually selling something they own. For example, if you sell your business, your house or stocks and shares, the tax on the profit you make is called capital gains tax.'
Pablo:'I heard that if somebody gives you money or property after they die, the government even taxes that.'
James:'Yes, they do. It's called inheritance tax. So it's better to give your children money or property before you die.'
Pablo:'Don't you also have to pay tax if you import something (like a car or furniture) from another country?'
James:'From some countries you do. Governments tax products that are imported from another country or sometimes even exported to another country. These taxes are called customs duties or customs tariffs.'
Pablo:'Are there any more taxes?'
James:'Lots more. There is also a tax which you pay for living in a house or flat each year. In Britain, this tax is called the council tax. The higher the value of the house/flat you live in, the more council tax you pay.'
Pablo:'Do you have to pay council tax, if you have an office or shop?'
James:'Businesses don't pay council tax, but they do pay a tax that is very similar for any land or property that they use. It's called business rates here in Britain. Like council tax, the amount of tax paid in business rates depends on the value of the land or property that the company is using (the higher the value, the more tax is paid).'