What does the UK Government do with taxpayer money?

How the UK government spends tax money

Who is a taxpayer and why should I care?

A taxpayer is a person or unit that is expected to pay local or public tax authorities. With various other types, taxes can occur in the form of income tax or property tax on property owners like a vehicle or home. The majority of adults are taxpayers. At some point, almost every citizen becomes a taxpayer. When people purchase goods and services that have been taxed, they are paying taxes, albeit indirectly. The word “taxpayer” also refers to a country’s working population, which pays municipal systems and government programs via taxation.

How does the UK Government make money?

The UK government receives money via the following mechanisms:

  • Taxation – VAT (value-added tax) like the tax on beer, petrol, flights, etc., National Insurance, and Income Tax.
  • Credit or Borrowing– this is primarily done by bond issuance.
  • Money Creation – in the existing monetary system, the profits from this source are insignificant.

According to Statista, about a quarter of the governments total spend goes to welfare pay-outs, the largest percentile share. Following closely is health which almost hits another quarter. State pensions and education combined equate to the third quarter of government spending. In no particular order, other government expenditure is distributed among transport, government administrative costs, National debt interest, public order and safety, overseas aid, environment, culture, business and industry, defence, housing and utilities, and the cost of European Union membership.

The chart below indicates an estimation of the distribution among the different expenditure channels vis-à-vis the revenue sources.

source: https://upload.wikimedia.org/wikipedia/commons/f/fc/UK_budget_charts_2019-2020.png

There are direct taxes, derived directly by the government and quantifiable, included in the above summary. Then there are indirect taxes like a value-added tax (VAT). While VAT has been included in the summary above, Her Majesty’s Revenue and Customs (HMRC) do not retain data derived from individual consumer expenditure, necessary to indicate the total VAT any individual pays withing a given year.

According to the Office for National Statistics (ONS) figures released in November 2020, the government collected £145 billion from national insurance contributions and an additional £197 billion from self-assessment and PAYE in income taxes for the period 2019/2020. These taxes accounted for more than 40% of the overall current income of £828 billion in 2019/2020. The total managed expenditure is referred to as spending. The gross expenditure under administration for the same duration amounted to £884 billion. The gap between these two figures is net government borrowing (excluding banks in the public sector), generally referred to as a deficit. In 2019/20, it amounted to £56 billion.

UK Government deficit

The current deficit levels have sunk to a level last seen before the 2008 financial crash, largely attributed to a sharp decline in departmental spending since 2010. Many of the divisions have reduced their daily expenses to more than a fifth in actual terms. In recent years, federal support has expanded several agencies. Further expected cuts have not been enforced, and rises in spending seem now likely.

Cutting direct spending on public administration like the cost of operating Whitehall, including paying politicians, has been much higher than the overall cost of public spending in recent decades. For example, since 2012/13, employee spending has decreased by 20 percent in real terms. In the next few years, these cuts are unlikely to be restored.

UK Public Expenditure Statistical Analyses (PESA)

PESA is the publication of government spending, released annually. It is indicative of an illustrative payment breakdown of how National Insurance contributions and Income Tax is spent. It is largely dependent on information derived from government publications depicting Official Statistics.

Several factors cause the government to spend money:

  • Expenditure on military resources
  • To deliver public services (national defence, police, fire)
  • Transport costs
  • Provision of vital public services such as education and health (merit goods)
  • Inequality reduction through welfare payments such as unemployment benefit
  • Profit indebtedness interests

No one might have predicted in 1900 the unprecedented rise and reach of public service in the 20th century to reflect the future of democracy. They would not have thought that the very nature of efficiency, empathy and progressivism would appear to many people as this gigantic state provision. Of course, the establishment of the National Health Service (NHS) and the welfare state era did not begin in 1948.

Over the 1980s, government spending dropped from around 45 percent to 34 percent in 1989, as a percentage of the gross domestic product. In 2000, however, it increased to 40 percent of the GDP due to the exchange rate mechanism (ERM) sterling and subsequent slump, then declined to 35 percent. An exchange rate mechanism is an instrument used to control a country’s currency’s exchange rate in relation to other currencies. It can be utilized when a country uses either a floating exchange rate or a fixed exchange rate circumscribed around its peg.

Since 2000, public expenditure steadily grew, with a high of 44.9% of GDP in 2011, followed by a steady decline to 40.6% of GDP by 2016, and expected GDP of 38.8% by 2020.

The UK’s overall expenditure in 2021 is forecast at 908.1 billion pounds in parliament, central government and local councils. Estimations indicate that central public spending amounts to 724.8 billion pounds and local budgets to 183.3 billion pounds.

source: https://www.ukpublicspending.co.uk/

How the UK Taxpayer is affected by who creates money

The Bank of England (BoE) continues to print paper money like £10 notes, as it only costs a few pence to do so. The government then earns a profit on each banknote that it issues. This newly generated surplus amounted to £18 billion between 2000 and 2009, sufficient to fund some 90,000 nursing staff wages during the same period.

However, the BoE only produces the paper money then leaves the banks to generate the electronic funds that we use for daily transactions. If banks make capital, they get the rewards of making money, not the government or the taxpayer.

Between 2002 and 2009, banks raised the UK’s lending volume by £1 trillion (with each new loan generating new cash). Since banks generated the capital, it’s the banks that benefit, in this case, interest on a supplement of £1 trillion.

Suppose the government had developed the capital rather than banks. In that case, citizens may have been charged up to GBP 1 trillion fewer taxes. This is around GBP 33,000 for each income tax-paying individual who pays income tax for only seven years.

How your income tax and insurance contributions are invested is based on official figures released by the government in a comparative study of public spending. This report can be accessed in here.


This article has reviewed how the UK government spends taxpayer money. It can be frustrating for taxpayers to see their funds going to purposes they may not agree. Fortunately, UK citizens can vote for politicians who have similar beliefs and policy ideas when it comes to government expenditure.


  • https://www.gov.uk/government/publications/how-public-spending-was-calculated-in-your-tax-summary/how-public-spending-was-calculated-in-your-tax-summary#overview
  • https://www.statista.com/chart/4520/where-do-uk-taxes-go/
  • https://www.ifs.org.uk/publications/9178
  • https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/901406/CCS207_CCS0620768248-001_PESA_ARA_Complete_E-Laying__002_.pdf