The way multiple taxes add up to big bucks is my First Golden Rule of tax: lots of small taxes together combine to make large tax bills. Rather than hit us with a single massive demand that we can't help feeling bad about, the system is organised into lots of smaller levies that accumulate. There are lots of different taxes with lots of different names charged on lots of different things. But, in the end, you and I end up paying them all.

      Whether a tax is levied on the companies we work for, or the shops we buy from, it all comes out of our pockets. That's my Second Golden Rule of tax: no matter what name is on the bill, all tax is ultimately suffered by human beings. There is no magic pot of money for governments to dip into. Even when the government borrows, it must tax us in the future to pay back the debt. To understand your personal tax burden, you have to add up all taxes, even the ones that you don't pay directly and may not even know about.

      National insurance contributions

      We've seen that, as well as income tax, we also pay national insurance contributions on our salaries. It's time to have a closer look at this most misunderstood of taxes.

      When you pay national insurance contributions (usually abbreviated to ‘NICs’), what exactly are you contributing to? Many people are vaguely aware of a link between national insurance and their state pension. Indeed, you need to have been paying NICs for 30 years to qualify for the full state pension (if you miss a few years out, you can catch up on them later).

      Let's see what that means. Assume you are on average earnings of £26,500 throughout your 35-year working life. That means the combined employees' and employers' national insurance contributions paid on your salary will be about £4,750 a year. Now, suppose you invested that £4,750 a year in a private pension instead of paying it over to the government. With a growth rate of 5 % above inflation (the long-run rate of return for shares), your notional pension pot from payments equivalent to your national insurance contributions should be worth over £430,000 when you retire. That would get you an index-linked pension at today's historically low annuity rates of £14,750 a year. A few years ago it would have got you considerably more and, once interest rates return to normal levels with the economic recovery, we can expect pension annuity rates to rise as well. Alternatively, under the new pension freedom rules, you could take that £430,000 as income or reinvest it.

      The £14,750 a year pension you would have from saving £4,750 a year in a private pension scheme is a much better deal than the state pension of £8,094 that you really get for making those 35 years of contributions. Worse, if you work for longer (as most of us do) or pay higher NICs because you have higher earnings, you don't get a better state pension. The government does pay our national insurance contributions into a special fund separate from general taxation. But it is not investing the money to pay for your pension when you retire. The national insurance fund only has enough money in it to pay for about two months of benefits for today's claimants. In essence, it is a current account, not a savings account. The government collects money from people currently in work to pay pensions to today's retirees. There is no money set aside to fund pensions in the future. We are entirely reliant on our children being willing to cough up in the same way we have. So, looked at as a contributory pension scheme, national insurance is a very bad deal. However, we should instead regard NICs as another income tax with a different name. It accounts for a fifth of the government's revenues. Although it funds pensions and some other benefits, a large amount of it is used to pay for the NHS. Now, of course, the NHS needs funding and our taxes are the way to do it. But given national insurance contributions have no real contributory element and are really a tax on earnings, why don't we call them a tax?

      The answer is one of low politics rather than high principle. At the most basic level, it's a manifestation of the First Golden Rule of tax: lots of small taxes together combine to make large tax bills. It suits the government that we pay multiple taxes with low rates rather than a single transparent and easily understood levy. The complexity of the tax system means no one ever realises how much he or she is paying. This makes it a whole lot easier to extract more tax from us without causing a revolution. Combining income tax with employees’ and employers’ national insurance into a single levy would give us a basic rate of income tax of about 45p in the pound. No government wants to admit that tax rates are that high. So they prefer the sleight of hand of having a 20p income tax rate, 12 % employees' national insurance contributions and the essentially invisible 13.8 % employers' national insurance contributions.

      What, you might ask, is the difference between employers' and employees' national insurance? In all honesty: nothing. They are both taxes on your salary, they are both collected in the same way (through PAYE, which we will discuss further below) and your employer sees them both as amounts they have to pay to keep you turning up to work. The main distinction is that earnings are capped at £43,000 when calculating most of an employee's NICs (and the version paid by the self-employed). This recognises that, by earning more, you don't get better benefits or a bigger pension from the system. In fact, it was not until the 1970s that national insurance stopped being charged at a flat rate so that everyone paid the same. Thanks to Gordon Brown, you now also pay 2 % NICs on your earnings over the £43,000 threshold.

      Employers' NICs are 13.8 % of our entire salary above £8,112 without any upper limit. That means employers' national insurance embodies the Golden Rules of tax: following the First Rule, it is kept separate from income tax, even though it is a tax on income. This disguises just how much we actually pay. It is also in accordance with the Second Golden Rule: no matter what name is on the bill, all tax is ultimately suffered by human beings. Because this element of national insurance is paid by our employers, we don't realise that we are suffering it. But, despite all the subterfuge, ordinary people still end up shelling out.

      If you are in work, it's a good rule of thumb to treat NICs and income tax as the same thing, although there are, inevitably, various wrinkles and complications in the rules. For example, savers and pensioners pay income tax but not national insurance. When you factor in employers' NICs, this means there is twice as much tax on wages from work than on money you get from savings or your pension. This might make sense economically,