What is tax?

Tax is a ‘financial charge’ or deduction from something you get or own, or an additional cost added to something you buy. It is not a penalty or fine for doing something wrong. Normally, governments collect taxes so that there is a pot of money to spend for the benefit of society as a whole. This might be for law enforcement, including the police and courts, infrastructure, like roads and pathways, and administration.

The UK Government also uses tax to fund various public services, including healthcare and welfare benefits.

The UK has many taxes. Some are known as ‘direct’ taxes if they are levied on the income or profits of the person who pays it, rather than on goods and services. The main example is income tax, which you can see being taken from your pay or have to pay direct to HMRC. Other direct taxes include corporation tax, capital gains tax and inheritance tax.

There are also ‘indirect’ taxes, which are levied on goods and services. The most well-known example of an indirect tax is value added tax (VAT). This is less obvious than a direct tax as it is included in the price of things that you buy.

National Insurance is not strictly a tax. It was originally a contributions-based system of insurance for support from the government in times of need such as ill-health, disability or retirement, paid by workers and employers. The link between individual contributions and benefits has gradually weakened, but the number of years for which you make National Insurance contributions still affects some welfare benefits, including your entitlement to the state pension.

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