In the first eight months of the tax year, the UK experienced a historic surge in tax receipts, reaching an astounding £515.9bn. This notable increase of £24bn from the previous year was primarily fueled by soaring income tax receipts, revealing a complex interplay of economic factors.
Rising Income Tax and Frozen Thresholds:
The dominant contributors to this surge were income tax, capital gains tax, and National Insurance contributions, collectively rising by £12.1bn. Income tax alone witnessed a substantial increase from £148bn to £164bn in the April to November 2023 period. This significant spike is a direct consequence of the freeze on tax thresholds set in 2021, expected to remain unchanged until 2028.
Impact of Threshold Freeze:
The freeze on tax thresholds has led to approximately 1.2 million people being pulled into higher tax brackets due to salary increases. November 2020, prior to the freeze, saw income tax receipts at £14.1bn. In just four years, this figure has surged by £4.5bn, underscoring the lasting impact of the Chancellor's decision.
Expert Analysis and Positive Outlook:
Shaun Moore, tax expert at Quilter, notes the substantial growth influenced by frozen thresholds. While the 2% cut to National Insurance in the new year is expected to boost take-home pay, it may not fully counter the rapid increase resulting from frozen income tax thresholds and inflation-driven wage growth.
Tax Receipt Trends:
Throughout the year, income tax followed a predictable trend, spiking during self-assessment payment dates and annual bonuses for PAYE taxpayers in January and April. However, stamp taxes and tobacco taxes experienced notable declines of £3.7bn and £1.1bn, respectively.
Inheritance Tax Surges:
Inheritance tax recorded a notable increase of £400m in the first seven months, totaling £5.2bn. Danni Hewson, Head of Financial Analysis at AJ Bell, highlights the impact of inflation and increased VAT on tax revenues, contributing to a rise of almost £3bn compared to the same period last year.
Despite challenges posed by frozen thresholds and economic fluctuations, the UK tax landscape continues to evolve. Notably, inheritance tax is on track to reach record levels, demonstrating the ongoing financial impact of government policies and economic factors.
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