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How taxes are spent

Most people think that they are paying too much tax at some time or other!  At the same time, we all want to know that roads are going to be built and maintained and that we have sufficient police to keep us safe. On this page, we want to explain what your tax money is used for.

Taxes are spent on many different things. They are used for public spending, which means spending on public property - on institutions and services that are not privately owned.

So the taxes you pay are used to pay for:

  • transport
  • education
  • health
  • law and order
  • housing
  • culture, media and sport
  • trade and industry
  • environment, food and rural affairs
  • overseas development and defence.

Over the centuries, Governments have introduced many new taxes on specific items such as using motor vehicles on the roads or other ways of raising revenue such as National Insurance.  This was originally designed to pay for free medical services.  However, today very few taxes are used specifically for their original purpose.  Instead, most of our taxes go into a central fund, managed by Her Majesty’s Treasury, which allocates annual spending amounts to each Government Department.

Governments face similar budgeting and housekeeping challenges to those we face in our own households.  How do we make sure we don’t spend more than we are earning?  How do we earn more if we want to spend more?  How much is it safe to borrow so that we will not find it difficult to pay it back?

  • To learn more about how to budget, see our section Spending money and budgeting.

When the Government increases taxes it is because it needs more money to finance the services we have said we want. Sometimes tax needs to be increased to help deal with economic problems, for example, if the Government has borrowed too much.

In 2002, the government decided to raise taxes to improve public services such as education and health. This means that more money is taken from your salary – but at the same time you can benefit from better public services.

Local taxes
Local services are paid for in three ways.

These are:

Local services include many different things. Which of the following do you think are provided by your local council.


This is an impressive list of services. The amount of money which is spent on them varies with schools and education usually representing the larger part of the budget.

This pie chart illustrates an example breakdown of expenditure on local services.

Many local authorities provided detailed breakdowns of their expenditure for local people. This is usually included with your Council Tax bill in the form of a pamphlet.

Business Rates
Council Tax is the local tax which pays for local services but another important contributor is Business Rates. Their full title is Non-Domestic Rates. You have to pay Business Rates if you occupy a shop, office, workshop or other business site. However, you still have to a pay a reduced amount even if the building is empty.

In some cases you may be using your home to run a business or living over the business (e.g. a flat over a shop). In these cases you may have to pay both Council Tax and Business Rates. How you are using your home for the business is an important element in deciding if you need to pay Business Rates. You can find details about Business Rates on the Business Link web site.

Government Grants
Although Council Tax and Business Rates make a large contribution to paying for local services they are insufficient to pay for the all the services. The extra money comes directly from government and is calculated using a complex formula.

 

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