Most UK residents pay tax through Pay As You Earn (PAYE), which deducts income tax and National Insurance from each payslip. The self-employed report their income separately to HM Revenue & Customs (HMRC) through an annual self-assessment return. Income tax pays for public services such as the NHS, schools, defence and policing.
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National Insurance contributions build entitlement to the state pension and to certain benefits. Council tax is paid to the local authority and funds local services such as bin collection, street cleaning and adult social care. Value Added Tax (VAT) is added to most goods and services and is included in the price you see on the shelf.
The handbook expects you to recognise these as separate taxes with different purposes. The exam may ask which tax funds local services (council tax), which pays for the state pension (NI), or what HMRC stands for.
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