UK tax revenues set to break new records

Research has confirmed what your pocket already knows: UK taxes are at historically high levels.

Measuring how taxes have changed over time involves much more than simply looking at tax rates. Politicians are well aware of this, but they also know that it tends to be changes in rates that make the headlines.

Over the years, the result has been that adding extra money to the Exchequer’s coffers has involved considerable creativity on the part of the Treasury. Favourite methods have included:

·     Tweaks to national insurance contributions which, thanks to the name, much of the public fails to recognise as a tax in reality;

·     Freezing allowances, exemptions and tax thresholds, allowing inflation to dictate how much extra revenue is raised; and

·     Increasing taxes on businesses and leaving them to pass on the impact to their (individual) customers.

One way that economists use to cut through the smoke and mirrors of tax policy is to calculate for any particular year how much tax the government raises from all sources as a percentage of the size of the economy (gross domestic product (GDP)). This approach has the advantage of avoiding both the billions and the distorting effects of inflation.

In September, the independent Institute for Fiscal Studies (IFS) carried just such an exercise. Its conclusion, published two days before the Conservative Party conference was due to start, was: “This has been the biggest tax-raising parliament since records began, pushing UK tax revenues to historically high levels.”

At the time of the last general election (December 2019), UK tax revenue was 33% of GDP. When the next election arrives, assumed to be in 2024, the IFS calculates the corresponding figure will be around 37%. That extra 4% is equivalent to about £3,500 more tax per household, although as the IFS notes, the rise will not be distributed evenly.

According to the IFS, a rate of 37% takes tax levels back to the 1940s, but perhaps surprisingly the Institute says that the COVID-19 pandemic is “far from the only – or even most significant – explanation.” The main reason has been higher government spending “on things that pre-date the pandemic,” such as expanding NHS and police workforce numbers.

Given an ageing population, there seems little likelihood that the government’s tax take will fall any time soon. How much you contribute towards it will depend on your financial planning.

The Financial Conduct Authority does not regulate tax advice.