UK tax burden remains set for post-war record high, despite cuts

Nearly four million additional workers are likely to be brought into the tax system between 2022/23 and 2028/29.

Ian Jones
Wednesday 22 November 2023 16:34 GMT
The freeze in income tax thresholds is one of the main drivers of the rising tax burden (Dominic Lipinski/PA)
The freeze in income tax thresholds is one of the main drivers of the rising tax burden (Dominic Lipinski/PA) (PA Wire)

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Louise Thomas

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The overall tax burden in the UK remains on course to reach its highest level since the Second World War, despite cuts to national insurance announced by Jeremy Hunt in the autumn statement, figures suggest.

The burden is forecast to rise from the equivalent of 36.3% of GDP (gross domestic product, or the total value of the economy) in 2023/24 to 37.7% by 2028/29, according to the Office for Budget Responsibility (OBR).

The tax changes announced by Mr Hunt in his statement are estimated to have reduced the tax burden by 0.7% of GDP.

But the overall forecast is still expected to rise every year and hit a post-war record, driven by the freeze in income tax thresholds and strong earnings growth, the OBR said.

Since March 2021, the income tax personal allowance has been frozen at £12,750 while the higher rate threshold has been frozen at £50,270.

The freeze has meant that over time, as wages have increased, people have either been brought into tax system for the first time or moved on to higher rates – a trend known as “fiscal drag”.

Higher-than-expected earnings both increase the numbers likely to be paying a higher rate of tax and the amount of tax that they pay.

Freezing the thresholds means that, between 2022/23 and 2028/29, nearly four million additional workers will pay income tax, three million more will move to the higher rate, and 400,000 more will pay the additional rate, the OBR forecasts suggest.

The freeze is estimated to raise £42.9 billion for the Treasury by 2027/28 and £44.6 billion by 2028/29 – around two-thirds of the entire cost of the Covid-19 furlough scheme.

It is described by the OBR as the “largest contributor” to the rising overall economy-wide tax burden, responsible for almost a third of the 4.5% of GDP increase in taxes from 2019/20 to 2028/29.

The cut in the rate of employee national insurance contributions from 12% to 10%, which will take effect in January 2024, will leave average earners “slightly better off” once the impact of the frozen tax threshold are accounted for, according to Paul Johnson, director of the independent research body the Institute for Fiscal Studies (IFS).

Low earners and high earners “will still be worse off”, however.

Analysis published by the IFS suggests that for an employee on average full-time earnings (£35,000 per year), the cut in national insurance contributions will offset the impact on incomes of the tax threshold freezes until 2024/25.

Beyond that point, the freezes “are likely to continue to eat further into their incomes each year up to and including 2027/28, at which point they will be paying £249-a-year more in direct tax overall as a result of all the changes since 2021”.

People on lower incomes “lose more from freezing tax thresholds than from raising tax rates, and hence they gain less from cutting rates than from increasing thresholds”.

A peak in the overall tax burden of 37.7% of GDP in 2028/29 would be 4.5 percentage points above the level before the pandemic.

The figure reached its lowest level in 1960/61, when it stood at 27.9% of GDP.

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