Business Services, Personal tax

What’s the best way to increase tax? Do nothing….

By RJP LLP

What’s the best way to increase tax? Do nothing….

Collecting tax by stealth is something the government is very good at. Freezing personal allowances and tax rate thresholds whilst rates of pay are increasing to compete with inflation is a crafty way to increase tax without having to do anything unpopular like raise headline rates. It is a very effective policy, which, according to economists, has generated around £40 billion in extra annual revenue for the Treasury.

The personal allowance has been set at £12,570 a year until April 2028; meanwhile salaries have increased due to increased costs of living, and this has resulted in a lot of people becoming taxpayers for the first time. Economists call this effect ‘fiscal drag’ and as a result of inflation, the amount generated is far higher than the Chancellor would have estimated initially. When the policy to freeze personal allowances, national insurance contribution thresholds and inheritance tax was first unveiled, experts estimated it would generate £8 billion a year. A year later the forecast was increased to £18 billion a year and in March it was further increased to £29 billion.

Now the estimate is £40 billion a year for the remaining 5 years – because Jeremy Hunt has extended the freeze until 2028. Why wouldn’t he, given how much money the policy generating? To put things into context, if the personal allowance had been increasing in line with inflation, it would be £16,200 today.

So, ahead of the 2023 Autumn Statement, bear in mind that should Jeremy Hunt do anything to cut tax, it won’t really be a giveaway – according to the Resolution Foundation estimates, the effects of fiscal drag will deliver the biggest income tax rise in the UK for over 50 years.

Keep an eye out for our 2023 Autumn Statement coverage on November 22. It is very difficult to tell what will be announced at this stage; although ‘tax cuts’ have been heralded it would be good to see some support for small business owners, reassurance about future R&D tax credit availability and maybe some respite for landlords to try and avert the continuing rental market challenges.

If you have any questions about tax, please email us via partners@rjp.co.uk

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