The budget position is revenue minus spending
- Subtract spending from revenue and read the sign, because a positive answer is a surplus and a negative one a deficit.
- Keep both figures on the same basis, so a full-year revenue figure is compared with full-year spending.
- To express the answer as a share of the economy, divide it by national income and multiply by 100.
Example
- A government's receipts for the year are £820 billion and its spending is £890 billion, with national income of £2,800 billion.
Step 1: subtract spending from revenue:
budget position=£820bn−£890bn=−£70bn \text{budget position} = \pounds820\text{bn} - \pounds890\text{bn} = -\pounds70\text{bn} budget position=£820bn−£890bn=−£70bnStep 2: divide by national income and multiply by 100 to express it as a share of the economy:
£70bn£2,800bn×100=2.5% \frac{\pounds70\text{bn}}{\pounds2{,}800\text{bn}} \times 100 = 2.5\% £2,800bn£70bn×100=2.5%- The negative sign says this is a deficit of £70 billion, which is 2.5% of national income.
Income tax is charged band by band
- Income tax is worked out by taking off the tax-free allowance first, then charging each band at its own rate.
- For 2026/27 the Personal Allowance is £12,570, the basic rate of 20% applies up to £50,270, the higher rate of 40% up to £125,140, and 45% above that (Source: GOV.UK).
- Only the income inside a band is charged at that band's rate, which is why a higher-rate taxpayer does not pay 40% on everything.
Example
- A worker earns £30,000 a year in the 2026/27 tax year.
Step 1: take the Personal Allowance off to find the taxable income:
taxable income=£30,000−£12,570=£17,430 \text{taxable income} = \pounds30{,}000 - \pounds12{,}570 = \pounds17{,}430 taxable income=£30,000−£12,570=£17,430Step 2: charge that amount at the basic rate, since none of it reaches £50,270:
income tax=20%×£17,430=£3,486 \text{income tax} = 20\% \times \pounds17{,}430 = \pounds3{,}486 income tax=20%×£17,430=£3,486- The worker pays £3,486, so the tax taken is well below 20% of the whole £30,000 because the allowance is untaxed.
VAT is worked out from the price paid
- VAT at 20% is added to the price before tax, so a £100 item before tax reaches £120 on the shelf.
- To pull the VAT back out of a price that already includes it, multiply by 20 and divide by 120.
- Dividing the full price by 5 gives the wrong answer, because the 20% was charged on the smaller pre-tax figure.
Example
- A household spends £6,000 a year, VAT included, on standard-rated goods such as furniture and electronics.
Step 1: multiply by 20 and divide by 120 to extract the VAT:
VAT paid=£6,000×20120=£1,000 \text{VAT paid} = \pounds6{,}000 \times \frac{20}{120} = \pounds1{,}000 VAT paid=£6,000×12020=£1,000Step 2: subtract to find what the goods cost before tax:
price before VAT=£6,000−£1,000=£5,000 \text{price before VAT} = \pounds6{,}000 - \pounds1{,}000 = \pounds5{,}000 price before VAT=£6,000−£1,000=£5,000- A fifth of the pre-tax price is £1,000, which confirms the extraction was done the right way round.
Say what each answer means
- A budget figure needs its sign explained, since the number alone does not say whether the government borrowed or repaid.
- A tax figure is more useful expressed as a share of income, because that is what says how heavily the tax falls.
- Round sensibly and keep the units, so a tax bill is in pounds and pence and a share is a percentage.
Exam technique
- Take the tax-free allowance off before applying any rate, because charging the rate on the whole income is the single most common error here.
- Use twenty over one hundred and twenty when a price already includes VAT, and one fifth only when the price is before tax.
Self review
- Revenue is £900bn and spending is £950bn. Calculate the budget position and name it.
- Calculate the income tax owed on a salary of £20,000 in 2026/27.
- A bill comes to £240 including VAT at 20%. How much of it is VAT?
- Why does a higher-rate taxpayer not pay 40% on all their income?
- Why is dividing a VAT-inclusive price by 5 the wrong method?
