Government finance

Government Revenue: Where Money Comes From

The UK government raises revenue primarily through taxation and National Insurance contributions. The main sources are:

• Income tax — the largest single source. Charged on earnings above the personal allowance at rates of 20% (basic), 40% (higher), and 45% (additional).
• National Insurance contributions (NICs) — paid by employees, employers, and the self-employed. Fund the NHS, state pension, and social security.
• Value Added Tax (VAT) — 20% tax on most goods and services. A major revenue source.
• Corporation tax — tax on company profits.
• Council tax, fuel duty, alcohol and tobacco duties, stamp duty — various other taxes.
• Government borrowing fills the gap when revenue falls short of spending (budget deficit).

Government Expenditure: Where Money Goes

The UK government's main spending areas:

• Social protection — the largest category: pensions (state pension is the biggest single item), benefits (Universal Credit, housing benefit, disability allowances).
• Health (NHS) — the second largest area; free at point of use.
• Education — schools, further education, and university funding.
• Debt interest — payments on the national debt, which has grown significantly since 2009.
• Transport, defence, housing, local government — other significant spending areas.

Direct and Indirect Taxation

Direct taxes are levied directly on the income or wealth of individuals and businesses. The taxpayer cannot shift the burden to someone else. Examples: income tax, corporation tax, inheritance tax, capital gains tax.

Indirect taxes are levied on spending/expenditure rather than income. They are often included in the price of goods and services and can be passed on from producers to consumers. Examples: VAT, fuel duty, alcohol and tobacco duties, sugar levy.

Progressive vs regressive taxes:

• A progressive tax takes a higher percentage of income from those with higher incomes — the effective tax rate rises with income. Income tax (with rising bands) is progressive. Progressive taxes reduce income inequality.
• A regressive tax takes a higher percentage of income from those with lower incomes — poorer households spend more of their income on taxed goods. VAT and duties on alcohol, fuel, and tobacco are regressive because lower-income households spend a larger share of income on these goods.