You may have heard the term VAT but do you know what it means?
VAT, or Value Added Tax, is a tax on most goods and services provided by registered companies in the UK. Our government collects VAT from the seller (the business) rather than the customer even though it is the customer who ultimately pays the VAT.
The standard rate of VAT is currently 20%. This means if you buy a DVD that costs £10 then £2 of that money goes to the government as VAT. Although 20% is the standard rate there are many things that have a reduced rate of VAT, are Zero Rated or are exempt from VAT.
Here are a selection of items in each VAT bracket.
Standard VAT (20%)
Chocolate, electrical goods, ice cream, crisps, petrol, hot take-away food and stationary.
Reduced Rate VAT (5%)
Children's car seats, electricity, gas, heating oil and solid fuel (coal).
Zero Rate VAT (0%)
Cycle helmets, biscuits (not chocolate covered), books (not ebooks), cereals, eggs and milk.
Exempt from VAT
Antiques, TV licence, postage stamps, membership subscriptions and lottery tickets.
Wait I'm confused, what is the difference between Zero Rate VAT and VAT Exemption?
If a business sells goods that qualify for Zero Rate VAT the company themselves can recover VAT on their costs. This means they can expect a repayment each month from the government.
If exempt goods are sold no VAT can be reclaimed on any costs the company may have paid.
Things could be more confusing!
Although this might all seem hard work at least you know when you go into a shop that the DVD you want to buy is £10 because that is what it says on the price tag. There are some countries that charge tax but you have to work out for yourself how much it will cost.
For example, if you wanted to buy a DVD in Canada the price tag might say C$10 but at the till you would actually have to pay a 13% Goods and Services Tax (GST) so the final cost would be C$11 and 30 cents.
It is easy enough working out the tax on one item but can you imagine have a shopping basket full of things and having to work out if you have enough money?
Monday 29 April 2013
Sunday 10 February 2013
Pensions Explained
'Pensions, aren't they for old people'
The word Pension means a regular payment made during a person's retirement. So, in a sense pensions are for old people.
BUT...
The sooner a person starts contributing towards their pension the more money they will receive when they retire. Private pensions are something you really need to consider as soon as you start earning money
All through your working life, a proportion of your income is paid to the government as tax. We have already seen that the taxes collected are used to pay for things like schools, hospitals and the police force, and a proportion of the tax is paid out to retired people as old age pension.
The age at which you can claim your old age pension is currently 65 for men, and 60 for women, but this is changing. If your were born after 1968, then the chances are you wont get your old age pension until you are 68 (for both men and women).
One of the reasons for this, is that people are living longer. This means that where they only used to live for 18-20 years after retiring, most now live for 28-30, which means the money the government pays out has to last longer and longer. There are also fewer people in work, and therefore fewer people paying tax into the pot for the government to use.
The standard amount of money you get when you retire is also getting less and less, and this is one of the reasons that it is never too early to start thinking about saving for retirement with a private pension. Just imagine having to work until 68, and then not even getting enough pension money to live on.
It makes sense to think about long term savings as soon as you can, as most people look at retirement as the time to relax and enjoy the fact they don't have to go to work anymore, not worrying if they have enough money to buy the basic things in life.
The word Pension means a regular payment made during a person's retirement. So, in a sense pensions are for old people.
BUT...
The sooner a person starts contributing towards their pension the more money they will receive when they retire. Private pensions are something you really need to consider as soon as you start earning money
All through your working life, a proportion of your income is paid to the government as tax. We have already seen that the taxes collected are used to pay for things like schools, hospitals and the police force, and a proportion of the tax is paid out to retired people as old age pension.
The age at which you can claim your old age pension is currently 65 for men, and 60 for women, but this is changing. If your were born after 1968, then the chances are you wont get your old age pension until you are 68 (for both men and women).
One of the reasons for this, is that people are living longer. This means that where they only used to live for 18-20 years after retiring, most now live for 28-30, which means the money the government pays out has to last longer and longer. There are also fewer people in work, and therefore fewer people paying tax into the pot for the government to use.
The standard amount of money you get when you retire is also getting less and less, and this is one of the reasons that it is never too early to start thinking about saving for retirement with a private pension. Just imagine having to work until 68, and then not even getting enough pension money to live on.
It makes sense to think about long term savings as soon as you can, as most people look at retirement as the time to relax and enjoy the fact they don't have to go to work anymore, not worrying if they have enough money to buy the basic things in life.
Wednesday 12 December 2012
What makes share prices move?
The rise and fall of share prices has an impact on our lives even if we don't own any shares. If your parents have a private or company pension it is more than likely invested in the stock market.
If the value of shares goes up the pension will be worth more and if the shares go down the pension will be worth less.
Understanding a little about the rise and fall of shares may help you make important financial decisions later in life.
It is clear to see when a company performs well their shares go up and when they under perform their shares go down. This simple rule generally holds true but there can be times when the shares move in a way that goes against expectations.
When a company reports low profits investors may buy the shares because they hope things will improve. This will force the share price to rise despite the report of low profits being bad news.
If a company is doing very well and has a very high share price investors only stand to lose money if they invest so the share price may fall.
These two examples demonstrate how important long term performance expectations are to the value of shares.
Why not take a look at some of the company performance charts on Junior Trader and see how much share prices have moved in the last year?
Share price changes are often very gradual but certain events can trigger huge rises or falls. If you find a company with a dramatic share price change try investigating a little further to see what caused this.
If the value of shares goes up the pension will be worth more and if the shares go down the pension will be worth less.
Understanding a little about the rise and fall of shares may help you make important financial decisions later in life.
It is clear to see when a company performs well their shares go up and when they under perform their shares go down. This simple rule generally holds true but there can be times when the shares move in a way that goes against expectations.
When a company reports low profits investors may buy the shares because they hope things will improve. This will force the share price to rise despite the report of low profits being bad news.
If a company is doing very well and has a very high share price investors only stand to lose money if they invest so the share price may fall.
These two examples demonstrate how important long term performance expectations are to the value of shares.
Why not take a look at some of the company performance charts on Junior Trader and see how much share prices have moved in the last year?
Share price changes are often very gradual but certain events can trigger huge rises or falls. If you find a company with a dramatic share price change try investigating a little further to see what caused this.
Wednesday 5 December 2012
Tax Facts
Tax is one of the most important, but least popular aspects of money.
Tax is basically an amount of money that is paid directly to the government on any sum that you earn, or have in savings.
There are many different types of tax, but the key one we will cover here is called 'income tax'.
This is simply a tax on your income, and income can be described as money you earn (wages) or income from investments (interest).
An example of this would be if you earn £100 a week, then £20 of that goes to the government as tax, leaving you with £80. The £80 is known as net pay or the money left after tax.
The government collects tax from everybody who works, or has investments. They then use this money to pay for many different things such as schools, hospitals and roads that we all use.
Some people think that this is the fairest way of paying for things, as everybody contributes towards the things we all use. Some however think it is unfair, because the more you earn, the more tax you pay. In fact, if you earn over £150,000 per year, half of all your earnings goes to the government as tax!
The fact is though, there is no getting away from tax, and it is something that you will all pay as soon as you are earning money.
Tuesday 13 November 2012
What is a Mortgage?
Mortgage.
This is a word that many of you have probably heard, but most won't know what it is.
Put simply, a mortgage is loan from a bank or building society, usually of a large sum of money, that is used to buy a house.
The loan is paid back over a long period of time-normally 25 years. The bank then charges interest monthly on the loan, as a charge for lending the money.
Because the loan is usually large, and paid back with interest over a lot of years, the amount you pay back is often at least twice what was borrowed in the first place!
Because of the large sums of money involved, banks like to know that their loans are safe, and they will get their money back. To guarantee this, they place a charge on the house, called a security. This simply means, that if you don't pay the loan back to the bank, they can sell the house and get their money back that way.
A mortgage is the most common way of owning a house in the UK, as not many people have enough spare cash to be able to buy a house outright.
Banks work out how much they are prepared to lend, based on many different factors.
One of the main ways is by using an income multiplier. This is where they look at how much money you earn, multiply it by 4 and that's how much they will lend you to buy a house.
For example, if you earn £30,000 a year, the bank may lend you 4 times that amount (£120,000).
You will also need to pay some money towards the house, at the time you buy it. This is called a deposit. These start from 5% of the purchase price, and if you take the example above 5% of £120,000 is £6000.
So, as you can see, mortgages are often quite large, and can be very expensive, but still remain the most popular way of owning your own home.
This is a word that many of you have probably heard, but most won't know what it is.
Put simply, a mortgage is loan from a bank or building society, usually of a large sum of money, that is used to buy a house.
 |
| Mortgages are loans used to buy a house. |
The loan is paid back over a long period of time-normally 25 years. The bank then charges interest monthly on the loan, as a charge for lending the money.
Because the loan is usually large, and paid back with interest over a lot of years, the amount you pay back is often at least twice what was borrowed in the first place!
Because of the large sums of money involved, banks like to know that their loans are safe, and they will get their money back. To guarantee this, they place a charge on the house, called a security. This simply means, that if you don't pay the loan back to the bank, they can sell the house and get their money back that way.
A mortgage is the most common way of owning a house in the UK, as not many people have enough spare cash to be able to buy a house outright.
Banks work out how much they are prepared to lend, based on many different factors.
One of the main ways is by using an income multiplier. This is where they look at how much money you earn, multiply it by 4 and that's how much they will lend you to buy a house.
For example, if you earn £30,000 a year, the bank may lend you 4 times that amount (£120,000).
You will also need to pay some money towards the house, at the time you buy it. This is called a deposit. These start from 5% of the purchase price, and if you take the example above 5% of £120,000 is £6000.
So, as you can see, mortgages are often quite large, and can be very expensive, but still remain the most popular way of owning your own home.
Tuesday 6 November 2012
Recession - What does it mean?
The word 'recession' has been used in the news almost everyday for the last 3 or 4 years. When people talk about the economy being in recession do you know what it means?
The technical definition tells us the economy is in recession if it shows negative growth for two successive quarters.
Or, in simpler terms if the amount of services and goods produced by the UK (the Gross Domestic Product or GDP) falls every 3 months for a period of 6 months.
Types of Recession
Mild Recession - The economy may shrink for 2 successive quarters (6 months) but then recover over the remainder of the year to show an increase in productivity over a period of 12 months.
Severe Recession - When the economy shows a decline over 4 successive quarters (a full year) the recession is labelled as severe or full-blown.
Double-dip Recession - An economy may slide back into recession after appearing to have recovered. This type of longer term recession makes recovery more difficult.
This graph shows UK Economy Growth over recent years. The areas highlighted in Red indicate recession as they cover 2 quarters or more.
The 2008/2009 recession is a Severe Recession as it continued for 5 consecutive quarters.
The large 3rd quarter increase of 2012 is thought to be due to the Olympics bringing money into the UK economy.
The technical definition tells us the economy is in recession if it shows negative growth for two successive quarters.
Or, in simpler terms if the amount of services and goods produced by the UK (the Gross Domestic Product or GDP) falls every 3 months for a period of 6 months.
Types of Recession
Mild Recession - The economy may shrink for 2 successive quarters (6 months) but then recover over the remainder of the year to show an increase in productivity over a period of 12 months.
Severe Recession - When the economy shows a decline over 4 successive quarters (a full year) the recession is labelled as severe or full-blown.
Double-dip Recession - An economy may slide back into recession after appearing to have recovered. This type of longer term recession makes recovery more difficult.
This graph shows UK Economy Growth over recent years. The areas highlighted in Red indicate recession as they cover 2 quarters or more.
The 2008/2009 recession is a Severe Recession as it continued for 5 consecutive quarters.
The large 3rd quarter increase of 2012 is thought to be due to the Olympics bringing money into the UK economy.
Wednesday 31 October 2012
Interested By Interest?
What is Interest? When you take out a loan you will have to pay back the amount you borrowed and some extra money called interest. This interest is the charge for borrowing the money.
Interest is quoted as a percentage. Here is an example to demonstrate how interest works when taking out a loan.
Why do we have to pay Interest? The payment of interest is compensation to the lender to:
Why do I get Interest on my savings? In the same way we can borrow money from banks they also borrow money from us.
When you have money in your savings account the bank uses it to lend to others. The bank pay you interest for borrowing your money!
Interest is quoted as a percentage. Here is an example to demonstrate how interest works when taking out a loan.
Oscar borrows £10,000 from his bank to buy a new car and the interest rate on the loan is 6%. Can you see how much money Oscar has to repay to the bank?
6% of £10,000 is £600.
Oscar will have to repay a total of £10,600 to the bank
Why do we have to pay Interest? The payment of interest is compensation to the lender to:
- Cover the risk of the loan not being repaid.
- Cover the cost of profits that could have been made investing the money elsewhere.
Why do I get Interest on my savings? In the same way we can borrow money from banks they also borrow money from us.
When you have money in your savings account the bank uses it to lend to others. The bank pay you interest for borrowing your money!
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