This outcome asks you to know which taxes raise the most money for the UK government and who actually pays them. The examiner likes it because it tests whether you can rank the taxes and separate personal taxes from employer and business taxes.
The rule
In order of size, the principal sources are income tax, NICs, VAT and then corporation tax. Council tax, business rates, excise duties, CGT and IHT are each smaller. Income tax and NICs together bring in over half of all receipts, so the Exchequer relies mainly on taxes on earnings and employment. NICs are paid by several parties: employees (Class 1 primary), employers (Class 1 secondary and Class 1A) and the self-employed (Class 4). VAT is an indirect tax, borne by the final consumer but collected and paid over to HMRC by VAT-registered businesses.
Worked example
Illustrative annual receipts of £1,000bn:
Income tax £300bn
NICs £250bn
VAT £200bn
Corporation tax £100bn
All others (council tax, business rates, excise duties, CGT, IHT) £150bn
Income tax + NICs = £300bn + £250bn = £550bn, which is 55% of receipts. This is over half, so the Exchequer relies mainly on taxes on earnings and employment.
Suppose CGT raises £10bn. A 10% change in income tax receipts is £30bn, but a 10% change in CGT receipts is only £1bn. A change in income tax or NIC policy therefore has a far larger revenue effect than a change in CGT or IHT.
Remember: NICs are not just an employee deduction, because employers and the self-employed pay them too, and corporation tax ranks fourth, not second.
Where candidates lose marks
Treating NICs as paid only by employees and forgetting employer Class 1 and Class 1A and self-employed Class 4.
Assuming CGT and IHT are major revenue raisers because they feature heavily in the syllabus, when they are among the smaller sources.
Ranking corporation tax second, when it comes after income tax, NICs and VAT.
Treating Class 4 NIC as an employer cost, when it is a personal tax on self-employed profits and employer Class 1 NIC arises only because staff are employed.
Try it: 3 questions
Lumen Circuits Ltd assembles electronic components and is reviewing the principal sources of UK government tax revenue. Which ONE of the following statements is NOT true?
Answer: C. Statement (c) is the untrue one. NICs are not an employee-only charge. Employees pay Class 1 primary NICs (8% on earnings from £12,571 to £50,270 and 2% above). Employers pay Class 1 secondary NICs at 15% on earnings above £5,000 and Class 1A NICs at 15% on taxable benefits. The self-employed pay Class 4 NICs (6% and 2%). Option (a) is true because income tax, NICs and VAT are the three largest sources of revenue. Option (b) is true because corporation tax raises less than income tax. Option (d) is true because VAT is borne by the final consumer but accounted for to HMRC by VAT-registered businesses, so it is an indirect tax. The error behind choosing (c) is looking only at the employee deduction on a payslip and forgetting the employer and self-employed NICs.
Harbourside City Council runs a leisure service and is reviewing an extract of government receipts for a year. The extract shows income tax as the largest source, followed by NICs, then VAT, then corporation tax. Council tax, business rates, excise duties, CGT and IHT are each smaller. The extract also states that income tax and NICs together exceed half of total receipts. Which ONE of the following conclusions is supported by the extract?
Answer: D. Income tax and NICs together exceed half of total receipts, so the Exchequer relies mainly on taxes on earnings and employment. A change to income tax or NIC policy therefore has a much larger revenue effect than the same change to CGT or IHT, which the extract shows as smaller sources. The first option is wrong because CGT and IHT are among the smaller sources, however much attention they receive in the syllabus. The second option is wrong because corporation tax is fourth, after income tax, NICs and VAT. The third option is wrong because VAT and excise duties are each smaller than income tax or NICs, and income tax plus NICs alone exceed half of all receipts, so spending taxes cannot exceed earnings taxes.
Priya is a sole trader who runs a veterinary practice and has trading profits of £60,000 in 2025/26. She employs one assistant and buys supplies from VAT-registered suppliers. During the year she also sold an investment property at a gain. Which ONE of the following correctly identifies the taxes that Priya pays personally on her own profits and gains, and the tax that arises only because she is an employer?
Answer: B. Priya's trading profits of £60,000 are charged to income tax. As a self-employed person she also pays Class 4 NIC on those profits (6% from £12,571 to £50,270 and 2% above). The gain on the investment property is charged to CGT. All three are taxes on her own income or gains. Class 1 employer NIC (15% on her assistant's earnings above £5,000, subject to the employment allowance) exists only because she employs staff. It is a cost of employing the assistant and is not a tax on her own profits. Option 1 wrongly treats Class 4 as an employer charge, when it is a personal tax on self-employed profits. Option 3 treats Class 1 employer NIC as personal and Class 4 as employer-based, which swaps the two. Option 4 treats all NICs as personal and ignores that Class 1 employer NIC arises only from employing someone. The VAT on her supplies is a distractor, because it is not one of the four taxes listed.
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The largest are income tax, NICs and VAT, followed by corporation tax. Council tax, business rates, excise duties, CGT and IHT each raise less.
Who pays national insurance contributions?
Employees pay Class 1 primary NICs, employers pay Class 1 secondary and Class 1A NICs, and the self-employed pay Class 4 NICs. So NICs are not an employee-only charge.
Is VAT a direct or indirect tax?
VAT is an indirect tax. The final consumer bears it, but VAT-registered businesses collect it from customers and account for it to HMRC.