Perfect storm for UK finances as tax receipts fall and spending rises

•    Government tax take drops 43% in May – as furlough and Covid-19 hit receipts
•    VAT dropped 106% as businesses use Government support scheme
•    Government spends £16.6bn on furlough and self-employed scheme in May

Laura Suter, personal finance analyst at investment platform AJ Bell, comments:

“The amount we all paid in tax fell again in May, as the country entered its second month of lockdown and huge swathes of the population were furloughed or saw their income hit. The Government now faces a perfect storm of plummeting tax receipts at the same time as spending has soared, meaning some very large plugs are going to have to be found to stem the holes in the public accounts.

“April had already seen tax receipts fall off a cliff and this continued in May, with further drops in the amount of income tax, National Insurance, VAT and corporation tax we all paid. The total tax taken by the Government was down more than 40% compared to May 2019 and was down more than a quarter on April’s receipts. The amount of income tax paid in May dropped a further 22% on April, and was down 15% on the same month the previous year.

“VAT once again saw the largest fall, as businesses made use of the Government’s VAT deferral scheme, with receipts down 106% as people could still claim refunds but held off paying their bills. Stamp Duty payments also saw a larger fall than in April, dropping by 56% compared to May 2019, as the housing market started to get moving again but few people had made it to completion in May after the lockdown.

“The figures also reveal that the amount the Government is spending on its furlough scheme has almost doubled between April and May, rising from £5.2bn in April to £9.8bn in May. In addition a further £6.8bn was spent on the self-employed version of the scheme, which was launched in May, taking the total cost of these two support schemes to £16.6bn in May alone.

“Falling taxes at the same time as rising spending leaves the Government with some tough sums to do. However, the public is willing to step up to help foot the bill, with our research showing that three-quarters of people would be prepared to pay more income tax to help fund the Covid-19 Government spending*. On average people would be willing to see a 4 percentage point hike in income tax, with two-thirds of people thinking we have a responsibility to contribute to help fund the additional Government spending.”

*Research conducted by AJ Bell and Opinium between 22/05/20 – 26/05/20 with 2,001 respondents

Total tax receipts in May, with year-on-year change

Source: HMRC