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Income tax provides the biggest source of revenue for the Exchequer. In 2021/22 it is forecast to raise £198.2 billion. By comparison National Insurance contributions (NICs) and VAT are forecast to raise £146.8 billion, and £127.9 billion, in the same year. Taken together the three taxes raise just under 60% of UK government revenues.[1]

The Office for Budget Responsibility note, “The main reason that income tax is the biggest source of revenue is that personal income makes up the majority of total national income. There are many sources of personal income on which income tax is levied. These include: labour income (the wages and salaries of employees and earnings of the self-employed), income from investments (including interest on savings and the rental income from buy-to-let properties) and pensions income (from both the state pension and any occupational or private pensions).”[2]

According to HM Revenue & Customs, in 2020/21 the top 10% of income taxpayers (including the top 1%) were expected to contribute around 60% of income tax receipts. The bottom 50% of income taxpayers (with incomes under £25,900) were expected to contribute around 9% of income tax receipts.[3] These figures only include those paying income tax. They exclude, for instance, anyone whose income is too low to be charged income tax.[4]

Income tax on earned income is charged at three rates: the basic rate, the higher rate and the additional rate. For 2021/22 these three rates are 20%, 40% and 45% respectively.  Tax is charged on taxable income at the basic rate up to the basic rate limit, set at £37,700. ‘Taxable income’ excludes personal allowances, which represent the amount of money someone may receive free of tax. Tax is charged at the higher rate on taxable income between the basic rate limit and the higher rate limit, set at £150,000. All three tax rates are unchanged from 2020/21.

The personal allowance is set at £12,570 for 2021/22. Both the allowance and the basic rate limit have been increased in line with inflation from 2020/21. As a result the higher rate threshold – the point at which individuals become liable to pay tax at the 40% higher rate – is £50,270 for 2021/22.[5]

In the 2021 Budget the Chancellor Rishi Sunak announced that the personal allowance and the higher rate threshold would be frozen for the four-year period 2022/23 to 2025/26.[6] This measure is forecast to raise £1.56 billion in 2022/23, rising to £8.18 billion in 2025/26.[7] Total receipts from income tax are forecast to rise from £198.2 billion in 2021/22 to £248.2 billion by 2025/16.[8]

This paper discusses the details of the Chancellor’s announcement, and the response there has been to it to date.

Notes

[1]   Office for Budget Responsibility, Economic and fiscal outlook, CP387, March 2021 p103 (Table 3.4: Current Receipts). Current receipts are forecast to be £819.3 billion in 2021/22.

[2]   OBR, Tax by Tax: Income Tax, updated July 2021

[3]   HMRC, National Statistics: Table 2.4 Shares of total Income Tax liability, June 2021

[4]   Tax statistics: an overview, Commons Briefing paper CBP8513, 15 February 2021 (see section 3.1)

[5]   HM Treasury, Budget 2021: overview of tax legislation and rates, March 2021 (Annex A: Rates and Allowances).

[6] HC Deb 3 March 2021 c256

[7]   Budget 2021, HC 1226, March 2021 (Table 2.1 – item 23). £1.6bn in 2022/23; £3.7bn in 2023/24; £5.8bn in 2024/25; and, £8.2bn in 2025/26.

[8]   OBR, Economic and fiscal outlook, CP387, March 2021 p103 (Table 3.4: Current Receipts).


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