Comparing Self Assessment And Paye Taxation Systems Accounting Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Taxation being imposed in every country is unique and creates benefits on both government and people. The imposition of the taxes is usually based on the deductions or contributions of the employers such as firms in any type of scales and individual contribution. The other taxation policies are applied like the trading and importation. The differences in taxes and its calculations differ depending on the regulation subjected for payment. All of the taxes, if used well, will create a great impact in the country such as building bridges, health care facilities, and other structures and programs served for the people of the country.

The UK Self-Assessment Taxation System

In the UK, the tax system called the self-assessment for individual taxpayers was introduced. However, this type of system appeared to be weak because of the consequences in the method of self-assessment of an individual taxpayer rather than the assessment of the Inland Revenue or tax-collectors that are the responsible in recording all the sources of income, claiming deductions and calculating the tax liability. In the failure of compliance of the taxpayers in their responsibilities will require them to face the statutory obligations. As part of the consequence, the Inland Revenue already granted the extensive powers to carry out the random audits on the record on the taxpayers within the time of twelve months following the date of filing. However, it is identified that in handling the self-assessment tax systems affects only the minority of UK taxpayers. And this is the reason that another tax system was introduced which is called Pay-As-You-Earn (PAYE) and will complete the taxpayers' obligation. Furthermore, this type of system provides the deduction of correct amount of tax at source from employment income throughout the year (McCourt-Larres & Middleton, 2002).

PAYE System

In the idea of collecting the taxes, the new tax credit system can be more efficient. The important change in the taxation system is the adoption of the PAYE system. In the tax credit, an individual can pay the taxes according to the personal requirements or qualifications and can depend on whether the taxpayer is single, married or widow/widower, employee, and others. On the other hand, under the new Pay-As-You-Earn system, every employee is given the tax credits and standard rate. Under the PAYE system, the method of tax deduction is applied where the employer calculate the tax dues and deducts it each time the salary is paid. In addition, there is an assurance that there is also an allocated payment for the social insurance contributions. Within the year of 2002, there are two rates - 20% and 42% which will effective depending on the standard calculation. For an instance, the weekly or monthly tax is subject to 20% to gross pay up to the standard rate cut-off point; while the balance of pay over the said amount is taxed at the higher rate of tax which is 42% (Irish Times, 2000).

To describe thoroughly the tax system, a simple computation will be presented in order to determine the contribution of the taxpayers.

Tax Calculation

A single person with an income of € 32,000 per annum is taken as an example. In addition assuming that he/she is living in rented accommodation, under 55 and a PAYE employee, the calculation for the tax liability with the relevant tax credits is as follows:

Tax Credits Due:

Personal Tax Credit

€ 1,520


PAYE Tax Credit

€ 660


Rent Tax Credit

€ 254


Total Tax Credits

€ 2,434

Gross Tax

Then if the income is € 32,000, the standard rate cut-off point for a single individual is € 28,000

Gross Tax:

€ 28,000

€ @ 20%

€ 5,600


€ 4,000

€ @ 42%

€ 1,680




€ 7,280

Less Tax Credits



€ 2,434

Next Tax Liability



€ 4,846

In looking into the computation, the system can be explained by working on the equation of

Gross Tax - Tax Credits = Tax Payable

In addition, the tax system has been made possible because of a standardisation of tax allowances, i.e. relief is granted at the standard rate of tax and not at an individual's highest rate of tax. The system actually means is that an equal amount of tax credit is available to all taxpayers (Irish Times, 2000).

Comparison of PAYE System and Self-Assessment System

In the comparison of collecting the taxes, it is acknowledged that the method in withholding the taxes at source or PAYE is considered to be efficient on both tax governing bodies and taxpayers. However, this might be a great burden on the tax collector which is the employers. The employers are the responsible in collecting and paying on the government on the behalf of each taxpayer (Ishi, 1992). The disadvantage on the method on tax collection may appear on firm's role in the tax collection and security contributions which can incur high cost in terms of contributions assessments. This can be mainly the reason why do some firms oppose the PAYE system in income collection based on the evidence presented by the French communities (Messere, 1998).

On the other hand, under the self-assessment system each taxpayer should personally assess taxable income that would- be much more expensive because the administration should re-assess the income, interest, and other earnings of each taxpayer. Aside from that, the manipulation of income declaration is highly possible. In the perspective from PAYE system the tax evasion can somehow be detected not unless the employer cooperates in the evasion and non-compliance that appears to be common in any country. However, taxpayer's should be subject for compliance in the specific tax rates because of the differences in their professions (Ishi, 1992). And if the policy befalls under the PAYE system, the government should also consider another tax rate because the firms are also subject to pay the business contributions which are an entity (Baldry, 1994).

Complexities in the UK Tax Self-Assessment System

Overall, the UK taxation system has many complexities. First, in the UK tax legislation is drafted in the context of the common law system. The level of detail and precision required in a common law system, if certainty of application is to prevail in a variety of different circumstances, results in verbosity and volume on a grand scale and `leads by its very nature to complicated law. Secondly, the annual renewal of income tax in the Finance Act ensures that those who draft the legislation are working under constant time pressure. In these circumstances the draftsmen not only have to provide the level of detail necessary to ensure certainty, but they also have to limit the potential for avoidance. These dual requirements produce legislation which is vague in some places, to discourage avoidance, but detailed in others to ensure certainty. Thirdly, while it is accepted that the primary purpose of taxation is to raise revenue it must be acknowledged that tax policy is often used by political parties to help secure their political ambitions. In trying to win votes by appealing to the different desires of heterogeneous taxpayers, taxation becomes more complex. On a more general level, the increasingly sophisticated and global business environment has influenced the complexity of the tax associated with it. Many of these complexities have an impact on the individual taxpayer. For example the tax treatment of income earned abroad or the calculation of capital gains tax on sophisticated share dealing are quite complex issues which face many taxpayers (McCourt-Larres & Middleton, 2002).

Complexities on PAYE System

The method might induce to annoy the employers due to the overall compliance on the pay-as-you-earn tax collection. The technique might be a burden for the employers since there is a heavy social security contribution. In order to escape or rather, lower the responsibility, the employers turn to the idea on non-wage labor costs and in their practice, they may shift the employees' compensations in lower wages. This will force the policy makers to withhold the income tax on wages and salaries for a substantial reduction in the employers' contributions (Messere, 1998). If there is a continuous reduction in the income tax earners, there is another possibility that the government may shift its attention into other forms of taxes such as the imposition of excise tax on the products like alcoholic beverages, cigarettes and tobacco, and other.