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A tax is a financial charge made by a government on individuals, consumers and businesses. In the UK, we categorise taxes as direct and indirect taxes. A direct tax is paid directly by a person or business to the government from wages or profits. An indirect tax is applied to a good or service at the point of sale.

Direct taxes include:

• Income tax is charged on income, it is paid as a percentage of earnings. There are different rates of income tax depending on how much money a person earns, a ‘basic’ rate, a ‘higher’ rate and an ‘additional rate. Owners of sole traders and partnerships pay income tax on the profits of their business.
• Corporation tax is a charge on a company’s profits. This type of tax only applies to private and public limited companies.
• National Insurance contributions (NICs) are charges to cover healthcare, state pensions and employment-related benefits such as Jobseeker’s Allowance. Both employers and employees pay it.

Indirect taxes include:

• Value-added tax (VAT) is a charge on sales of goods and services based on the value of the item sold. It is collected by businesses, which then pass it on to the government. VAT is charged on most goods and services sold in the UK.