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Income tax provides the biggest source of revenue for the Exchequer. In 2021/22 it is forecast to raise £213.2 billion. By comparison National Insurance contributions (NICs) and VAT are forecast to raise £157.0 billion, and £131.9 billion, in the same year. Taken together the three taxes raise just under 60% of UK government revenues.

In their overview of income tax 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).”

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 were 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.

In the Spring 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. This measure was forecast to raise £1.56 billion in 2022/23, rising to £8.18 billion in 2025/26. The Chancellor presented the Autumn Budget and Spending Review 2021 on 27 October, and although the Budget report did not discuss this tax increase in any detail, the freeze in both the personal allowance and higher rate threshold for 2022/23 was confirmed at this time.

The Treasury has published updated estimates for the Exchequer impact of this income tax increase: it is now forecast to raise £2.77 billion in 2022/23, rising to £13.04 billion in 2025/26.  Total receipts from income tax are now forecast to rise from £229.6 billion in 2022/23 to £268.4 billion by 2025/26.

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