Taxes can feel confusing, but the idea is simple: everyone chips in so we can share things no one could pay for alone. In this lesson of Mondosol’s Make Money course, Amara, our money coach, explains what taxes are, the main types you will meet, and how to read the tax line on a payslip.
Read the article, watch the videos, or press play and listen. The interactive lesson on the platform lets you practise.
In this article
What taxes are
A tax is money that people and companies pay to the government. It is not a fee for one thing you buy. It is a shared contribution that pays for public services.
Almost every country has taxes. The rules and rates differ a lot, so always check the official tax authority where you live.
Where tax money goes
- Schools and universities
- Hospitals and public health care
- Roads, railways and public transport
- Police, fire services and courts
- Pensions and support when people are ill or out of work
- Parks, libraries and culture
The taxes you will meet
- Income tax: a share of what you earn from a job or business.
- VAT (value added tax): added to the price of many things you buy. In Norway it is called MVA: 25% standard and 15% on most food. In the UK the standard VAT rate is 20%.
- Property and wealth taxes: in some countries, a tax on homes or on what you own.
- Excise duties: extra taxes on specific products such as fuel, alcohol or tobacco.
You pay VAT every time you shop, often without noticing, because it is already in the shelf price.
How income tax works
Many countries use a progressive system: the more you earn, the higher the rate on the extra money. A common myth is that a raise can make you earn less after tax. In a progressive system it cannot, because the higher rate only applies to the part above each limit.
Here is an invented example (not real rates) to show the idea:
| Part of yearly income | Tax rate | Tax on that part |
|---|---|---|
| First 100,000 kr | 0% | 0 kr |
| Next 200,000 kr | 20% | 40,000 kr |
| Above 300,000 kr (here 100,000 kr) | 30% | 30,000 kr |
| Total on 400,000 kr | 70,000 kr |
So the person pays 70,000 kr in total, which is 17.5% of 400,000 kr, even though their top rate is 30%.
Gross vs. net pay
- Gross pay: your pay before anything is taken off.
- Net pay: what actually lands in your account after tax and other deductions.
- Your employer usually takes the tax off every month and sends it to the tax authority. In Norway this is based on your skattekort (tax card), and once a year you check your skattemelding (tax return).
When you plan a budget, always use your net pay. That is the money you can really spend.
Watch: taxes explained
Video: “Why Do We Pay Taxes? (Explained Simply)” by Capital Clarity | How Money Works, on YouTube.
Video: “Taxes 101 (Tax Basics 1/3)” by MoneyCoach, on YouTube.
Videos may use examples from other countries. The ideas are the same, but rates and rules differ.
Try it: Amara’s receipt check
- Find a recent shopping receipt. Look for the VAT or MVA line.
- How much of the total was tax?
- If you have a payslip, find gross pay, tax taken off and net pay. What share went to tax?
FAQ
Why do we pay taxes?
To pay for services we share, such as schools, hospitals, roads, pensions and emergency services.
What is the difference between gross and net pay?
Gross pay is before tax and deductions. Net pay is what you actually receive.
What is VAT?
A tax added to the price of many goods and services. In Norway (MVA) the standard rate is 25%, and 15% on most food.
Can a pay rise make me earn less after tax?
Not in a normal progressive system. The higher rate only applies to the extra income above each limit.
Where can I check my own tax?
On your country’s official tax authority website, for example Skatteetaten in Norway or HMRC in the UK.
Keep learning
- Practise it: open the interactive Make Money lessons in your learning journey.
- Next lesson: Module Review: Money Basics.
- Previous lesson: Understanding Prices: supply, demand and inflation.
- Related: Earning vs. Spending: the flow of money.
This article is educational and is not financial advice. Amara is a fictional character from the Mondosol cast.
