What You Need to Learn
- Define tax and understand why we pay it
- Know the difference between direct and indirect taxes
- Understand how the PAYE system works
- Know income tax bands and rates
- Understand National Insurance, VAT, and Capital Gains Tax
💷 Why Do We Pay Tax?
R Richard's Economic Responsibilities
"I work as a self-employed potter. Every year I pay taxes on my earnings to the government. The government uses this money to pay for services that all citizens can use - the NHS, schools, roads, and pensions."
What Does Tax Pay For?
| Service | How it Helps the Bakers |
|---|---|
| NHS Healthcare | Free doctor visits for all family members |
| Education | Ben and Sophie's school |
| State Pension | Philippe and Lisa's retirement income |
| Benefits | Jobseeker's Allowance helped Marion when unemployed |
📋 The PAYE System
🎯 EXAM ALERT: 64% of students thought PAYE stands for "Pay As You Go". It's "Pay As You Earn"!
M Marion's Payslip
"I earn £24,000 a year - that's £2,000 gross per month. But I don't receive all of it. The hotel deducts tax and National Insurance before I'm paid."
The Grand Hotel Plc
Marion Baker | October 202X
Marion Baker | October 202X
Gross Pay£2,000.00
PAYE Tax-£190.50
National Insurance-£144.32
Pension-£80.00
NET PAY£1,585.18
Quick Check: PAYE
📊 Income Tax Bands
Personal Allowance: £0 - £12,570 = 0% (tax-free)
Basic Rate: £12,571 - £50,270 = 20%
Higher Rate: £50,271 - £125,140 = 40%
Additional Rate: Over £125,140 = 45%
⚠️ Common Mistake: 45% of students thought someone earning £25,000 pays the Additional Rate (45%). They actually pay Basic Rate (20%)!
S Sue (£25,000/year)
| Personal Allowance (0%) | £12,570 |
| Taxable income | £12,430 |
| Tax rate | 20% (Basic) |
D Daniel (£60,000/year)
Daniel pays Basic Rate (20%) on some income AND Higher Rate (40%) on income over £50,270.
Activity: Which Tax Band?
💰 Direct vs Indirect Tax
| Direct Taxes | Indirect Taxes |
|---|---|
| Paid directly to HMRC • Income Tax • National Insurance • Capital Gains Tax • Inheritance Tax |
Added to prices • VAT • Excise Duty • Stamp Duty |
Card Sort: Direct or Indirect?
🛒 VAT (Value Added Tax)
| Standard 20% | Reduced 5% | Zero 0% | Exempt |
|---|---|---|---|
| Electronics, furniture, restaurant meals | Home energy | Food, children's clothes, books, postage stamps | Education, insurance |
🎯 EXAM: Postage stamps are ZERO-RATED for VAT!
📈 Capital Gains Tax
D Daniel's Shares
"I bought shares for £5,000. They're now worth £12,000. If I sell them, I pay Capital Gains Tax on the £7,000 profit - NOT Income Tax!"
🎯 EXAM: 55% confused this. Share profits = Capital Gains Tax, NOT Income Tax!