Who will bear the brunt of any tax increases?

06 July 2016

Andrew Hubbard

IIn the aftermath of the UK’s decision to leave the EU, George Osborne announced that the rate of corporation tax in the UK may fall to below 15 per cent to help maintain the UK’s competitiveness as an attractive place in which to do business. Whilst it remains to be seen whether the new Chancellor, Philip Hammond, will commit to such a corporation tax reduction, it is worth considering what the impact would be on other taxes, particularly taxes on income, should this come to fruition.

It is worth reminding ourselves that taxes on income (and I will come back to what that term actually includes in a moment) are by far the largest single component of UK tax receipts. HMRC's statistics show that, in 2015-16, income taxes represented 54 per cent of the total tax take.

The statistics in this form go back to 1980 and, averaged out over all the years since that date, the total tax take from income taxes is 54 per cent. That surprised me when I read it. Looking back with fond memories to the many Budgets since then (and I covered most of them at the time!), my recollection is of ever changing rates and allowances, and shifts in tax policy. Yet what the statistics show is that much of this operates only at the margins and that there is a solid block of income tax receipts which consistently underpin the national finances. In years where total tax receipts are static or declining (such as the period from 2007-07 to 2008-09) the percentage goes up - simply because income tax receipts are more resilient than taxes on business profits and consumption.  

The fact that this level of income tax receipts is almost a 'given' is clearly good news for the Chancellor, but it also means that if he were to try to raise more from income taxes to compensate for a drop in business taxes he would have some difficult decisions. Raising the basic rate of income tax would seem politically impossible, so Mr Osborne or his successor would be far more likely to tweak the system to bring more people into higher rates, perhaps by further restricting allowances and reliefs.  This would be consistent with trends in recent years. In 1979 the top 10 per cent of earners paid 35 per cent of the total income tax bill: by 2016 that figure was almost 60 per cent. If we look at the top 1 per cent the figures are even more acute: it moves over the same period from about 10 per cent to about 28 per cent. So if there is to be an increase in the income tax take both history and politics suggest where it will come from!

Finally, a word on definitions. The percentages I have quoted from the HMRC publication include National Insurance Contribution (NIC) within income taxes. Although it is of course calculated by reference to income, much of the burden falls on employers through secondary contributions. Employer's NIC has become far more expensive than it used to be and the trend is only one way. The average employer contribution rate in Europe (not the EU) for 2015 was 22.85 per cent against a UK rate of 13.8 per cent. I strongly suspect that we will be closer to the European average within the next decade, which will put more pressure on employers in the future.

If you would like any further information on the points raised, please get in touch with Andrew Hubbard or your usual RSM contact.

Related services