Key Stage 4 citizenship · Financial capability

GCSE citizenship: how taxes are raised and spent

In Years 10 and 11, citizenship pupils study public money: how the state raises it through taxes and borrowing, and how it chooses to spend it on things like health, schools, pensions and defence. For teenagers who are starting to think about part-time jobs and their first payslips, it explains what happens to money before and after it reaches them. It is also a topic where reasonable people disagree, so pupils practise researching evidence and building a supported argument.

How public money is raised and spent, explained

The government pays for public services mainly with money raised through taxes. The biggest sources in the UK are income tax, which is taken from earnings, National Insurance, which is also taken from earnings and counts towards entitlement to some benefits such as the state pension, and VAT, which is added to many goods and services. Companies pay corporation tax on their profits. Other taxes include fuel duty, taxes on alcohol and tobacco, and council tax and business rates, which are collected by local councils. Pupils learn to sort these into direct taxes, which are paid straight from a person’s income or profits, and indirect taxes, which are built into the price of what is bought.

A central idea is fairness, and pupils learn that there is more than one way to judge it. A progressive tax takes a larger share from people with higher incomes, and income tax works this way: there is a tax-free amount, then bands with higher rates on higher slices of income. A regressive tax takes a larger share of income from people who earn less. A proportional tax takes the same share from everyone. Your child may be asked to read a simple payslip and spot the gross pay, the deductions for income tax and National Insurance, and the net pay that actually arrives. Rates and thresholds change from time to time and differ in some parts of the UK, so teachers usually use current figures that they supply.

Spending is the other half of the story. Pupils learn that the two largest areas of government spending are social protection (which includes pensions and benefits) and health. Other large areas include education, defence, policing, transport and the interest paid on past borrowing. Local councils spend on services such as social care for adults and children, bin collections, libraries and road repairs. The Chancellor sets out the government’s plans in a Budget, and Parliament has to approve them. Every choice involves a trade-off: money spent in one place cannot also be spent in another, unless taxes rise or the government borrows more to cover both.

When a government spends more than it raises in a year, it has a deficit, which it covers by borrowing. Each year’s borrowing adds to the national debt, the total owed from the past, and interest has to be paid on that debt. When taxes raised are greater than spending, there is a surplus. Pupils meet these ideas because they sit behind many of the political arguments they will hear. Economists and politicians disagree about how much borrowing is sensible and how far a country’s finances are like a household’s, which is why citizenship lessons stick to explaining the ideas and asking pupils to judge the evidence.

The curriculum also asks for skills rather than facts: using a range of research strategies, weighing up evidence, making persuasive arguments and backing up conclusions. In practice that means finding official figures, noticing whether a statistic is a total, a percentage or an amount per person, separating fact from opinion, and checking who produced a claim and why. Citizenship is a National Curriculum subject in Key Stages 3 and 4, but not every pupil takes a GCSE in it: whether it is offered as a GCSE is a choice made by the school. This topic sits alongside other money topics at Key Stage 4, such as income and expenditure, credit and debt, insurance, and savings and pensions, which look at personal finance rather than the public purse.

Words your child will hear

Direct tax: A tax taken from a person’s income or a company’s profits, such as income tax and corporation tax.
Indirect tax: A tax built into the price of goods and services, such as VAT, so it is paid when you spend.
Progressive tax: A tax that takes a bigger share of income from people who earn more.
Regressive tax: A tax that takes a bigger share of income from people who earn less, even if the rate looks the same for everyone.
Budget: The government’s statement of its plans for tax and spending, announced by the Chancellor of the Exchequer.
Deficit: The gap in one year when the government spends more than it raises. It is covered by borrowing.
National debt: The total amount the government owes from borrowing over many years.

What the National Curriculum says

The programme of study for Key Stage 4 says:

Pupils should be taught about income and expenditure, credit and debt, insurance, savings and pensions, financial products and services, and how public money is raised and spent
Pupils should develop their skills to be able to use a range of research strategies, weigh up evidence, make persuasive arguments and substantiate their conclusions.

Objectives from the National Curriculum in England, © Crown copyright, used under the Open Government Licence v3.0.

Try it: testing a claim with evidence

A classmate says: “VAT is a fair tax, because everyone pays the same 20%.” Use evidence to test the claim. For the maths, assume prices include VAT at 20% and that all the spending below is on goods that carry it. The households are made up.

Say what “fair” will mean. Here, test fairness by asking what share of each household’s income goes on the tax, not just the rate printed on the receipt.
Find the VAT in a price that already includes it. A price with 20% VAT added is 120% of the original, so VAT is 20 out of every 120, which is one sixth of what is paid. Household A has an income of £400 a week and spends £360. Household B has an income of £1,600 a week and spends £960.
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A: £360 ÷ 6 = £60 VAT
B: £960 ÷ 6 = £160 VAT
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Turn each amount into a share of income. Household B pays more pounds, but compare the fractions.
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A: 60 ÷ 400 = 0.15 = 15%
B: 160 ÷ 1,600 = 0.10 = 10%
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Explain the pattern. Household A spends nearly all of its income (£360 of £400), while Household B spends only £960 of its £1,600 and the rest goes on savings or on things that do not carry VAT, such as rent. A tax on spending takes a larger share from the household that spends most of what it earns.
Look at the other side. In real life, many basics, such as most food and children’s clothes, are zero-rated, meaning no VAT is charged on them, which reduces the effect on lower incomes. Also, VAT is only one tax: income tax is progressive, so you would need the whole system to judge overall fairness.

A model conclusion: “The claim is only partly true. VAT is the same rate for everyone, but in this example it takes 15% of Household A’s income and only 10% of Household B’s, so it is regressive. However, many basics are zero-rated and income tax is progressive, so VAT on its own does not show how fair the whole tax system is.” The strength of the answer comes from the calculation, a stated meaning of fairness and a fair look at the counter-argument.

Common mistakes and how to help

Believing that moving into a higher tax band means all your income is taxed at the higher rate

People hear “40% taxpayer” and imagine the whole salary is taxed at 40%, so they worry that a pay rise could leave them worse off.

What helps: Show that each rate applies only to the slice of income inside its band. With invented numbers: if the rule were nothing on the first £10,000 and 20% above that, someone earning £10,100 would pay 20% of £100, which is £20, not £2,020.

Confusing the deficit with the national debt

Both are in the news together and both are about borrowing, so the words get swapped.

What helps: Use a bath. The deficit is how fast the water is running in this year; the national debt is how much water is already in the bath. A deficit adds to the debt, and a surplus would reduce it.

Thinking National Insurance is a personal savings pot that the person will draw on later

The name sounds like insurance, and the payslip lists it as a separate line, so it seems to be paid into an account with your name on it.

What helps: Explain that it is a tax on earnings. It counts towards entitlement to things like the state pension, but today’s contributions largely help to pay for today’s pensions and benefits, rather than being set aside for each worker.

Saying “I don’t pay tax because I don’t have a job”

Teenagers link tax with payslips and may not realise that tax is also inside prices.

What helps: Go through a recent shopping trip. VAT is included in the price of most adult clothes, electronics, meals out and games, and there are separate duties on fuel, alcohol and tobacco. Ask which tax was paid by each purchase.

How to help at home

Read a payslip together. If you are comfortable doing so, show a payslip with the figures you choose to share, or look at a sample one. Find the gross pay, the deductions and the net pay, and ask your child what each deduction pays for. Teenagers with a part-time job can check their own.
Follow one purchase. Pick an item your child has bought and ask which taxes were paid along the way: VAT in the price, tax on the shop’s profits, income tax and National Insurance on the staff’s wages. It makes the idea of indirect and direct taxes concrete.
Spot public spending on a walk or drive. Count what you pass that is paid for from public money: a school, a clinic, street lights, a library, a bus lane. Then ask who decides how much is spent on each, and what might be given up if it grew.
Hold a mini Budget debate. Give your child a pretend £100 to share between health, schools, policing, transport and defence, then ask them to defend the split to someone who would divide it differently. Making them argue with evidence, not just opinion, is what the curriculum asks for.
Check where a claim comes from. When a headline or social media post makes a claim about tax or spending, ask who produced it, whether it gives a total, a percentage or a figure per person, and whether official figures could confirm it. Practising this together builds the research skills the course wants.

Builds on

Key Stage 3: The functions and uses of money
Key Stage 3: Budgeting
Key Stage 3: Managing risk with money