Sunday, March 26, 2023
A higher tax burden is upon us, and it's mainly by stealth
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

A new tax year is almost upon us, and accountants and financial advisers are burning the midnight oil to ensure that they have done everything they need to before the curtain comes down on 2022-23. For everybody else, this April people and businesses have every reason to look forward to the new tax year with trepidation.

We know, thanks to Jeremy Hunt’s budget earlier this month, that the main rate of corporation tax is going up from 19 to 25 per cent, reversing nearly four decades of cuts, and taking us back to roughly where the rate was at the start of the current period of Tory government, in 2010.

A policy of cutting corporation tax rates, pursued by Tory and Labour governments, has thus gone into reverse. For business it will mean that corporation tax receipts will rise to 3.7 per cent of gross domestic product (GDP), compared with between 2 and 2.5 per cent in recent years. It will be the most since the tax was first introduced in 1965. The chancellor’s more generous but temporary capital allowances do not stop this happening.

Some even more extraordinary things are happening to personal taxation as a result of the prolonged freeze in income tax allowances and thresholds. Calculations by the Office for Responsibility (OBR) show that the freeze, which was extended by Jeremy Hunt for two years in his autumn statement and will now last until 2027-28, represents a massive stealth tax. If it is not the biggest ever such tax, certainly as it affects individuals, it is hard to think of any bigger.

Combined with the reduction in the additional rate threshold – the rate at which the very top rate is paid – from £150,000 to £125,140, a direct consequence of autumn’s mini budget disaster, income tax is going up a lot. By the end of the freeze, receipts will be an additional £29 billion a year, equivalent to an extra 4p on the basic rate of income tax.

The policy will result 3.2 million new taxpayers, a rise of nearly a tenth, 2.1 million more higher rate taxpayers and 350,000 more paying the additional 45 per cent rate. By any measure, this is a big increase in income tax.

Tax is tax, whether it is upfront, as with the corporation tax hike, or stealthy, as with the long freeze in income tax allowances and thresholds, and a related freeze for national insurance.

The journey to a higher tax burden has already begun. In 2019-20, ahead of the pandemic’s impact on the public finances, taxes were 33.1 per cent of GDP. This fiscal year, the figure is 36.8 per cent, on its way to a projected peak of 37.7 per cent from 2026 onwards.

This is new territory. The average tax burden for the UK (national accounts taxes as a percentage of GDP) is 32.1 per cent, in figures that go back to 1948. The only year that comes close to what is in prospect now is 1948’s 37.2 per cent, when taxes were coming down as the wartime economy was being converted back to peacetime normality.

Until now, the tax burden tended to self-correct when it rose too much, implying a limit to how much it could rise, something Rishi Sunak was aware of when he was chancellor. A rise in the burden to 35.1 per cent of GDP in 1969-70, in the aftermath of sterling’s November 1967 devaluation, was followed by a sharp fall in the burden, to less than 30 per cent in 1972-73, during the Barber boom. One question is whether anything will intervene this time. An attempt to reverse the rise in the tax burden during Liz Truss’s brief premiership ended in turbulence and tears.

Higher taxes are, of course, the price we have to pay for more public spending. The government’s plans are for government spending to settle at between 43 and 44 per cent of GDP, compared with less than 40 per cent of GDP in the run-up to the pandemic. Public spending commitments being what they are, and with a change of government on the horizon, the only way to get this ratio down is via faster growth in GDP.

Plenty of countries have higher tax burdens than the UK, as the OBR points out. The rise in the UK may take it above the average for the other six members of the G7 (America, Japan, Germany, France, Italy and Canada) but not the 14 Western European members of the EU before its expansion to the East. They already have an average burden of almost 40 per cent of GDP, bumped up by countries such as Denmark on 45 per cent plus. France around 45 per cent, and Austria, Italy, Finland, Sweden and Belgium between 40 and 45 per cent.

There are, though, important differences. Though the UK tax burden was higher than other European countries in the 1960s and some of the 1970s, they have become accustomed over many decades to paying more in tax.

For many of these countries, particularly the Scandinavian economies, there has long been a social contract which matches higher taxation to stronger welfare states and better public services. People pay more in tax and, in return, expect to see the benefit in the services they receive.

Things are different in the UK, and it would be hard to argue that there is any such social contract now. Public support for the NHS was strong during the pandemic but has fallen in the wake of industrial disruption and the huge backlog of operations and other procedures. Public support for the police has been eroded further after the latest critical report from Baroness Louise Casey on the Met. People and businesses are paying more in taxes, but they do not believe they are getting the benefit in better services. This is logical. Some of the increase in taxes is to pay the government’s debt interest bill. Many public sector workers feel undervalued and squeezed, hence the current wave of strikes, which is only now subsiding.

Most of all, successive UK governments, including this one, have tried to maintain the illusion of being able to combine low taxation with ever-higher spending on public services, some of it made necessary by demographic changes. The current stealth increase in income tax is a classic example of the genre – remember that it was once combined with a cut in the basic rate of tax – but people should not be fooled. We are becoming a higher tax economy and the attempts to disguise it are merely resulting in an even messier tax system.