The mass media is awash with comments, articles, and eye-catching figures about taxation in the UK. As individual taxpayers, the government tax take today is the highest since the 1940s and could worsen before it gets better. This then prompts the question, who pays all the tax, and is the burden shouldered fairly across the UK?
Only when you begin to dig deeper into the facts, figures, myths and truths do you get an accurate idea of the situation. Prepare to be surprised, if not shocked!
What is the government’s tax take each year?
If we look back to the 2022/23 tax year, the most recent figures with a comprehensive breakdown, we see that the government raised £787 billion in taxes. Broadly speaking, this is split between:-
Income tax
This is by far and away the government’s most productive tax channel, raising £247 billion in the 2022/23 tax year. Those who follow economics will be aware that the government recently introduced what is known as “fiscal drag”, freezing personal income tax allowances. While this may seem relatively innocuous, it will increase government income tax receipts as wages rise with inflation while allowances remain static. The allowances are expected to stay at current levels until at least April 2028, although a change in government could see this reviewed.
National Insurance
Using data from the 2022/23 tax year, we know that total national insurance receipts were £176 billion. This was prior to two recent cuts in national insurance announced by the Conservative government. As part of their general election strategy, the Conservative Party floated the idea of removing national insurance in its entirety, but this is more an aspiration than a current target.
Value-added tax (VAT)
While VAT has remained at 20% since January 2011, rising from the previous level of 17.5%, it has been much lower in the past. Originally introduced as a replacement for the purchase tax in 1973, a 33% tax levied on luxury goods, it was initially reduced from 10% down to 8% in 1974. In the early days, there were different rates for different types of goods, but the rates were merged in 1979 into a single 15% charge. There was an increase to 17.5% in 1991 before a short-term cut to 15% between December 2008 and December 2009, followed by an increase to 20% in 2011.
In the 2022/23 tax year, VAT raised £160 billion for the government.
Corporation tax
Over the years, we have seen many tweaks to corporation tax rates, with the primary rate currently standing at 25% and 19% for companies with profits under £50,000. Typically, corporation tax tends to edge up when the economy is strong and fall when the economy is struggling. In the 2022/23 tax year, corporation tax raised £81 billion for the UK government. There are also various allowances which companies can use to reduce their taxable profits and corporation tax liabilities.
As well as basic corporation tax, the government has raised additional funds via a range of business levies such as:-
- Energy profits levy
- Apprenticeship levy
- Electricity generator levy
- Bank levy
- Bank surcharge levy
- Digital services tax
While many of these levies are relatively small compared to the government’s overall tax revenues, we could see increases in areas such as digital services and energy profits charges going forward.
Fuel duty
While fuel duty raises a relatively modest £25 billion for the UK government, it is perhaps one of the most controversial. The price of fuel is split into two income streams:-
- A flat rate of 52.95p per litre for both petrol and diesel
- 20% VAT on the product price and the fuel duty
Over time, the effective tax rate on a litre of petrol and diesel has varied from in excess of 70% down to around 45%, and it currently stands at just over 50%. Many people fail to realise that a significant percentage of the price you pay at the pumps is tax. As electric cars become more popular, fuel duty is expected to fall, but part of this reduction will likely be made up by a future tax on electric vehicles, whether directly or indirectly.
Inheritance tax
In line with fuel duty, inheritance tax is one of the more controversial revenue channels for the government, raising £7 billion in the 2022/23 tax year. This has been a relatively volatile income stream in recent times, registering around £2.2 billion in the 2000/01 tax year, rising to nearly £4 billion in 2007/08 before falling back to £2.4 billion in 2009/10, after which the rise has been dramatic.
As a consequence of freezing the inheritance tax threshold at £325,000 back in 2009, inheritance tax income is expected to hit £7.5 billion in the 2024/25 tax year. As the threshold will be frozen until at least the 2027/28 tax year, many experts are forecasting a significant increase in inheritance tax over the next few years.
Other income
The government also receives revenues from an array of relatively minor sources, such as capital gains tax, royalties, etc, which account for an additional £91 billion. As we see various industries switching from, for example, fossil fuels to green energy, the digital revolution, and growing interest in digital assets, some of these “relatively minor” income streams could increase going forward.
Interesting tax facts
There are some interesting facts about tax revenues, how they are used, how they are raised and the number of taxpayers in the UK. For example, did you know:-
- In the 2022/23 tax year, £83 billion of tax income was used to pay interest on government debt (10.5% of all taxes raised)
- Government debt, as of 30 September 2023, stood at £2.65 trillion
- The top 50% of taxpayers pay over 90% of all tax revenues
- Approaching 50% of potential taxpayers in the UK pay no tax
- There are approximately 32 million taxpayers in the UK
- The top 1% of taxpayers paid 28% of all government tax revenues in the 2022/23 tax year
- Only around 440,000 taxpayers are in the 45% income tax band
- Those in the top 5% of income tax payers earn a minimum of £87,000 per annum
On the surface, the UK taxation system seems relatively straightforward, focused on income tax, national insurance and corporation tax. However, it gets a bit more complex when you delve a little deeper. There are also some interesting facts you may not have been aware of!
Summary
It is only when you begin to dig a little deeper into government income streams that you realise the growing reliance on income tax, national insurance, VAT and, to a lesser extent, corporation tax. It is forecast that UK tax revenue for the 2023/24 tax year will be circa £950 billion, which is around 37% of GDP, or in layperson’s terms, an average of £17,200 for each adult in the UK.
These figures reiterate the need to manage your personal and business tax liabilities as efficiently as possible. If you would like to discuss your finances in more detail and potentially reduce your tax liabilities, please feel free to call us at your convenience.