Budget Round-up

Amidst all the new spending announcements in the Budget, there was, surprisingly, no explanation of how these are to be funded.

There were no explicit tax increases and the Chancellor didn’t feel the need to remind us that he is freezing income tax rates and allowances for the next few years, nor that there will be an increase in National Insurance (NI) rates and the rate of tax on dividends from April 2022 (the new Health and Social Care Levy will be charged as additional NI from April, before changing its branding as an entirely new tax from April 2023).

The charts below show predicted tax receipts for the current year and next year, broken down into Income Tax, VAT and NI plus all other taxes.

Other taxes include, among others, Corporation Tax, Excise Duties, Council Tax, Business Rates and Capital Taxes (Capital Gains Tax and Inheritance Tax). As shown in the graphs, the predicted take from these other taxes as a percentage of all receipts will fall as the yields from Income Tax, VAT and NI increase.

Income Tax and NI are vital for the Exchequer, and together they account for more than 40% of all tax receipts in the UK.  We already know about the new Health and Social Care Levy, so most of the predicted rise in NI receipts can be explained by that.  But Income Tax receipts are predicted to increase by nearly 8%, with no changes to either the rates or allowances apart from an increase in the rate of tax on dividend income, to match the higher NI for the Health and Social Care Levy.

Clearly, inflation will partially explain this, but especially in the case of Income Tax this is not the whole story.

Successive Governments have a track record of introducing tax bands which do not increase in line with inflation. For example, the threshold for the higher rate of 40% is currently £50,270 and is to be frozen until 2026 so, as wages increase more and more people are being dragged beyond this threshold, meaning the rate of tax on their increased income could double from 20% to 40%.

Other tax bands have  simply never been increased since they were introduced.  Where income is between £100,000 and £125,140 the personal allowance is withdrawn gradually, which gives an effective tax rate of up to 60%.  The £100,000 starting point for this was introduced in 2010 and has never been increased.

Also, the additional rate of 45% is applied when taxable income exceeds £150,000, and this threshold too has not changed since it was introduced ten years ago.

As a result, Governments do not need to do anything to increase tax revenues: inflation does the work for them, and they don’t need to run the risk of any damaging headlines in the press.

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