There are lots of things that we find useful that we are not willing to or able to pay for with our own money. Things like roads, street cleaners, electricity power stations, clean water supplies. In order for us to have these things we need our country’s government to pay people to provide them. The money that pays for this comes from taxes that our government imposes on us.

There are lots of different types of tax, but the two we are going to look at here are sales tax and income tax.

A sales tax (sometimes called VAT or Value Added Tax) is a tax which is imposed on the sale of a good. So, for instance, in the UK the sales tax is 20%. This means that if a company wants to sell a computer for £500, they must also pay the government 20% of that amount. They will normally do this by selling it for £600 and sending the extra £100 to the government.

Example

Exercise

Let’s complete exercise 16I from pages 274 and 275 of the textbook:

The answers are below:

Income Tax

Most governments raise much more money by income tax. This is imposed on earnings over a certain threshold. Earnings below the threshold don’t suffer tax.

So, for instance, if you earn £50,000 and the tax allowance is £20,000 and the tax rate is 15%, then let’s work out how much tax you will pay. Note also that we call the £50,000 your gross income.

So, first we need to calculate your chargeable income. This is your gross income minus the tax allowance, so 50,000 – 20,000, so 30,000.

Now we apply the tax to that amount. so 15﹪ x 30,000, so £4,500

Exercise

Let’s complete questions 2 to 7 of exercise 16J on page 275 of the textbook:

The answers are below: