Each year, the UK Government estimates how much it will cost to run government services, such as schools, hospitals, the National Health Service and roads. It then prepares a budget for that money.

After the government sets the budget, it uses the tax collected by the Inland Revenue to pay for government services. There are several different types of taxes. The main taxes are income tax and goods and services tax:

There are two popular theories about the causes of inflation:

• Income tax
• Value Added Tax (VAT)
• National Insurance contributions
• Corporation tax

Taxes on Income and Spending

In most cases, people are taxed on what they earn. The more you earn, the more tax you pay and the more the government receives. In the case of Value Added Tax, however, you only pay tax according to how much you spend. Other taxes include fringe benefit tax, stamp duty, gift, customs duties and taxes on spending, such as excise duties on:

• Petrol
• Alcohol & Tobacco

Both employed and self-employed people pay taxes on their income. If an employee’s earning are above the tax threshold, taxes will be deducted at source (meaning that it is taken out of your pay before you see it). Self-employed people usually need to put money aside to pay their tax themselves. They may also collect VAT on goods and services they sell and pay it to the Inland Revenue.

People are taxed on income from investments, such as interest earned on bank deposits, dividends from shares and rent from investment properties.

As well as paying tax to central government, another form of tax is the tax paid to councils for local services. Homeowners and landlords pay this tax. If you are a tenant you also will pay this tax.

To Summarise

The government needs money to operate Most of this money comes from various taxes collected by the Inland Revenue. These taxes are charged on the income and spending of individuals and businesses.