If it sometimes feels like you simply pay more and more tax year on year – well, you might be right.
New research from HM Revenue and Customs (HMRC), published in the Financial Times, has revealed that the amount of annual Income Tax paid by Brits has doubled over the past two decades.
The data also shows that more people have been drawn into the tax system over the last 20 years. Read on to find out more about the staggering increase in the government’s tax take since the turn of the century.
What Income Tax looked like in 1999/2000
It sometimes seems like just a few days since the turn of the century. Tony Blair and Bill Clinton were in power, while Westlife, Boyzone, Shakira and S Club 7 topped the charts.
Wallace and Gromit creators Aardman had a huge cinema hit with Chicken Run, and Sir Steve Redgrave won the final of his five Olympic gold medals.
In the 1999/2000 tax year, Brits paid an eye-watering £93 billion in Income Tax.
- The Personal Allowance was increased in line with inflation to £4,335.
- Labour chancellor Gordon Brown introduced a new 10% starting rate of tax to be charged on the first £1,500 of taxable income.
- The basic Income Tax rate of 23% was charged up to the basic rate threshold of £28,000.
- The higher rate of Income Tax was unchanged at 40%.
Over the intervening two decades, much has changed. By 2018/19, the latest year for which figures are available, the total Income Tax paid by Brits had more than doubled to £187 billion. HMRC predicts the number will reach £199 billion by the 2021/22 tax year.
The HMRC data also shows that more people have been drawn into the tax system over this period. While there were 27.2 million taxpayers in 1999/2000, this had risen to 31.6 million people in 2018/19 despite the threshold for paying Income Tax having risen to £11,850.
HMRC anticipate that the number of taxpayers will rise further, encompassing 32.2 million people in 2021/22. This is driven by a growth in population and employment as well as the government’s recent freezing of Income Tax thresholds.
Freezes to tax thresholds likely to see the amount of tax rise
In bad news for high earners, the biggest growth in numbers is expected among additional-rate taxpayers. These are the people who pay Income Tax at 45% in England, Wales and Northern Ireland and 46% in Scotland.
HMRC estimate there will be 440,000 additional-rate taxpayers in the 2021/22 tax year, up 10.3% from 2018/19.
The number of additional-rate taxpayers will jump because the threshold has been frozen at £150,000 since it was introduced in 2010/11. HMRC say: “As average total incomes increase, more individuals become eligible for the additional rate.
Personal finance expert Sarah Coles told the FT: “Unfortunately, things are set to get far grimmer for the next few years. The freeze in the Personal Allowance and higher-rate tax threshold means more people will pay more tax, and the number of higher-rate taxpayers will grow again.”
Tax experts have also warned that more people will be brought into both basic and higher rates of Income Tax between now and April 2026. This is as a result of chancellor Rishi Sunak’s decision to freeze the Personal Allowance at his March 2020 Budget.
Rather than increasing in line with inflation as it has in recent years, the Personal Allowance will remain at £12,570 until April 2026.
At the time the independent Office for Budget Responsibility projected the changes would bring 1.3 million individuals into the Income Tax net by 2025/26 and lift 1 million taxpayers into the higher tax bracket.
3 simple ways to pay less Income Tax
Make the most of ISAs and pensions
ISAs are a tax-efficient way of growing your wealth. You don’t pay any tax on the interest you receive from a Cash ISA, while there’s no Income or Capital Gains Tax to pay on the profits you make from a Stocks and Shares ISA.
Contributions to your employer’s pension scheme are also tax-efficient, as they can be made from your gross pay before any tax is charged. The government will then top up your pension with tax relief, giving you a free bonus to boost your retirement savings.
Be careful with your pension withdrawals
Changes to pension rules in 2015 mean anyone over the age of 55 (rising to 57 in 2028) now have more flexibility when it comes to accessing their pension. Download our guide to your retirement options to learn more.
One of your options is to take all of your cash from your pension pot. However, be careful that you don’t end up paying more Income Tax then you should.
When you withdraw more than your 25% tax-free lump sum, the rest of the money you take will typically be added to your income for that tax year. It could therefore end up pushing you into a higher tax bracket, so you could lose 40% or 45% of the withdrawal to tax.
Working with a financial planner can add value here, as they can advise you of the most tax-efficient ways to draw your retirement income.
Donate to charity
When you donate to charity using Gift Aid, good causes can claim 25p for every £1 you give from the government.
If you’re a higher-rate or additional-rate taxpayer, you can then claim the difference between your tax rate and the basic rate on the donation on your self-assessment tax return.
And, if you donate through a payroll giving scheme, donations are made from your gross wage or pension. This means you’ll then pay less tax on your remaining income.
Find out more about the tax benefits of donating to charity in this useful guide.
Get in touch
If you want to consider ways to mitigate the amount of tax you pay, we can help. Please email firstname.lastname@example.org or call us on 01189 876655.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.