GCSECitizenship StudiesEdexcelRevision NotesB. Democracy at Work in the UK4. How Does Government Manage Public Money?Taxation

Taxation (Edexcel GCSE Citizenship Studies): Revision Note

Exam code: 1CS0

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on 28 January 2026

Introduction to taxation

Each year the government presents its Budget to Parliament, showing what it wants to spend for the following year and how the monies will be raised
In the 2025 Budget, the government announced that it expected to raise £1,304 billion, mainly through taxation, in 2026-27

Expected sources of taxation 2026-2027

Pie chart showing UK tax revenue sources: Income tax £359bn, VAT £220bn, NI £214bn, Corporation tax £104bn, and others totalling £1,314bn.

Direct taxation

Direct taxation refers to taxes that are paid directly to the government by individuals or businesses rather than being passed on through prices of goods and services
- Direct taxes are typically levied on income, profits, gains and wealth
They are a major source of government revenue, funding public services like healthcare, education and infrastructure

Main types of direct taxation in the UK

Type of tax	Explanation
Income Tax	Income Tax is charged on individual earnings, including salaries, self-employment income, pensions and some benefits For the 2025/26 tax year, most people have a Personal Allowance of £12,570 before any income tax is due Above that, the rates for England, Wales and Northern Ireland are 20% (basic), 40% (higher) and 45% (additional) on successive bands of income
National Insurance Contributions (NICs)	NICs are also direct taxes on earnings, paid by employees, employers and the self-employed to fund the NHS and state pensions
Corporation Tax	Corporation Tax is charged on company profits rather than personal income Businesses calculate their taxable profits and pay the rate directly to HMRC
Capital Gains Tax (CGT)	Capital Gains Tax is paid on profits from selling assets, such as property (not main homes) or shares, when the sale price exceeds the purchase price
Inheritance Tax (IHT)	Inheritance Tax is charged on estates passed on after a person’s death above a set threshold Only a small percentage of estates currently pay IHT

Indirect taxation

Indirect taxation refers to taxes that are charged on goods and services rather than on income or profits
- Indirect taxes are usually paid to the government through businesses, but the cost is passed on to consumers in prices
They provide a major source of income for the government
- Governments can adjust indirect taxes quickly to raise revenue or influence behaviour

Main types of indirect taxation in the UK

Type of tax	Explanation
Value Added Tax (VAT)	VAT is the main indirect tax in the UK and is charged on most goods and services The standard rate of VAT is 20% A reduced rate of 5% applies to some goods and services, such as domestic energy Some goods are zero-rated, including most basic food items, children’s clothing and books
Excise duties	Excise duties are indirect taxes placed on specific goods These include fuel duty, alcohol duty and tobacco duty Alcohol and tobacco duties are often increased to discourage harmful consumption
Environmental taxes	Some indirect taxes are designed to reduce environmental damage Examples include the Climate Change Levy and taxes on plastic packaging These taxes aim to encourage businesses and consumers to make greener choices

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