Introduction to the tax system
Here, we briefly explain what tax is and who HM Revenue & Customs (HMRC) are.
What is tax?
Tax is a ‘financial charge’ or deduction from something you get or own, or an additional cost added to something you buy. It is not a penalty or fine for doing something wrong. Normally, governments collect taxes so that there is a pot of money to spend for the benefit of society as a whole. This might be for law enforcement, including the police and courts, infrastructure, like roads and pathways, and administration.
The UK government also uses tax to fund various public services, including healthcare and welfare benefits.
The UK has many taxes. Some are known as ‘direct’ taxes if they are levied on the income or profits of the person who pays it, rather than on goods and services. The main example is income tax, which you can see being taken from your pay or have to pay direct to HMRC. Other direct taxes include corporation tax, capital gains tax and inheritance tax.
There are also ‘indirect’ taxes, which are levied on goods and services. The most well-known example of an indirect tax is value added tax (VAT). This is less obvious than a direct tax as it is included in the price of things that you buy.
National Insurance is not strictly a tax. It was originally a contributions-based system of insurance for support from the government in times of need such as ill-health, disability or retirement, paid by workers and employers. The link between individual contributions and benefits has gradually weakened, but the number of years for which you make National Insurance contributions still affects some welfare benefits, including your entitlement to the state pension.
Who collects tax?
HMRC are the UK tax authority. They are responsible for collecting and managing most UK taxes. They also interact with other government organisations – for example, they collect most student loan repayments. These are not a tax; they are repayments towards money that students have borrowed in the past. However, because they are calculated as a deduction from income, the tax system is a convenient way to collect them.
HMRC also collect and manage Scottish income tax on behalf of the Scottish government, but Revenue Scotland collect and manage devolved taxes in Scotland.
HMRC also collect and manage Welsh rates of income tax on behalf of the Welsh government, but the Welsh Revenue Authority collects and manages devolved taxes in Wales.
HMRC also pay some welfare benefits, like tax credits and child benefit.
Local councils are responsible for collecting council tax and rates.
What is ‘Your Charter’?
You can find HMRC’s Your Charter on GOV.UK. The charter sets out what HMRC expect from you (your obligations in relation to tax), but also what you can expect from them (your rights).
HMRC also have a Personal Information Charter, which explains what personal information they can collect about you, how they may collect the information and what they use it for.
Where can I find more information?
You can find out more information about what HMRC do and their responsibilities on GOV.UK.