- We paid £23.8 billion in income tax in June – up almost 13% from a year earlier (source: HMRC tax receipts and National Insurance contributions for the UK (monthly bulletin) – GOV.UK)
- The monthly income tax take for June has risen by 58% (or £8.7 billion) since June 2021 – shortly after the thresholds were frozen
- It demonstrates why there’s so much focus on Andy Burnham’s possible rethink of frozen tax thresholds
- However, the potential cost of upping the personal allowance or other tax thresholds could explain why the government started by cutting VAT on electricity
Sarah Coles, head of personal finance at AJ Bell, comments:
“Today’s figures show just why there’s so much enthusiasm for Andy Burnham’s suggestion that he’ll revisit the frozen personal allowance. This June we paid almost 13% more income tax than the same month a year earlier, and 58% more than we handed over in June 2021. If the thresholds were to remain in place until 2031, there would be far more tax pain to come, which is why a potential defrosting of the personal allowance is garnering plenty of attention.
“It reflects how people have been slowly drained of cash by this sneaky stealth tax over the years. It’s not just that the ranks of taxpayers have been swollen, so that 40.8 million of us are paying income tax now, it’s also the fact that taxpayers are handing over more cash each – with recent figures revealing an average of £8,510 this tax year compared to £7,470 three years earlier*.
“Burnham has suggested there may be tweaks to the personal allowance, but this is an expensive idea. HMRC has calculated that every £100 increase in the personal allowance costs around £1 billion, so raising it to match inflation since the freeze could cost around £35 billion. Given the pledge to stick with the fiscal rules, a pricey change like this would need to be offset by spending cuts or tax hikes elsewhere. It’s a difficult ask from John Healey as he steps through the door to Number 11 and he might not want to gain an early reputation as a tax-hiking chancellor.
“The cost of a potential change to income tax could explain why the government has led its cost-of-living announcements with the VAT cut on electricity bills – from 5% to zero. It’s set to kick in from 1 October, with the next price cap update, and save the average household around £45. It’s a clear signal that the government intends to take decisive action to bring people’s costs down. Plus, the government has suggested it can be paid for by axing plans for a digital ID card, rather than coming with the kind of hefty price tag of an income tax cut. By making the change to electricity alone, it also rewards the kinds of switches the government is trying to encourage – such as moving to electric cars.
“It will make a difference at a key time of year too. Where the cap will be set in October isn’t clear, because it depends on wholesale prices right now, and global uncertainty has seen them fluctuate so much. But if we get another hike as we go into the winter, households will need all the help they can get.
“Any further potential tweaks, including to income tax, remain to be seen. It means nobody can afford to wait for the government to cut their tax bill, so it’s worth taking steps to do it yourself. One of the most effective approaches is by making extra pension contributions, which offer tax relief at your highest marginal rate. If you risk paying tax on savings interest, it’s also worth considering a Cash ISA, where your savings can grow completely free of tax. If moving tax bands means a higher tax bill on your investments, then a Stocks and Shares ISA is a sensible option, protecting against both dividend tax and capital gains tax.”
