Barely more than half of adults pay income tax, says report

Tax Return

The percentage of adults paying income tax has fallen sharply since the financial crisis, while the best-paid earners in Britain have been asked to make a bigger contribution to balancing the government’s books, the Institute for Fiscal Studies (IFS) has said.

In an analysis of the changing shape of the tax system, the thinktank said tax receipts as a proportion of national income fell during the recent recession at their fastest rate since modern records began in the 1950s, but were now recovering.

It added that tax receipts would be back to their pre-recession level of around 37% of gross domestic product by the end of the decade, but there had been significant shifts in the sources of the revenue.

The IFS said the exchequer was getting less from corporation tax and excise duties, but more from VAT, the better-off, banks and a number of new taxes.

In a new briefing note, two IFS researchers, Helen Miller and Thomas Pope, said: “Whether these changes have been part of a clear and coherent overarching strategy is, to put it kindly, unclear.”

The study showed that there was a fall in the share of the adult population who pay income tax (from 65.7% to 56.2%) between 2007-08 and 2015-16 – a period when the government consistently raised the tax-free personal allowance. During the same period, there was an increase in the proportion of income tax paid by the top 1% (from 24.4% to 27.5%) caused by a lowering of the higher-rate threshold, a higher top rate of tax and less generous pension tax relief.

The increase in VAT from 17.5 to 20% was a revenue raiser but revenues from other indirect taxes have fallen, largely because fuel duty has been consistently frozen at 2011 levels. “This (political) choice to deviate from increasing fuel duty in line with inflation costs £4.4bn a year in 2015-16 terms,” the IFS researchers said.

They added that corporation tax receipts always went up and down with the economic cycle and had been hard hit by weak profits among banks since 2008. “There have also been many reforms in this area. Overall, corporation tax policies between 2010 and budget 2016 (including those that are due to come in before the end of the parliament) have resulted in a revenue cost of £10.8bn a year in 2015-16 terms. Moves to broaden the base and crack down on avoidance and new taxes on banks have not been sufficient to outweigh the cost of cutting the corporation tax rate from 28% to 17%.

“More thought should be given to whether, and if so how, the banking sector should be taxed differently from other sectors.”

The IFS said new taxes such as an apprenticeship levy and a sugar levy had “tended to be introduced hastily and without consideration of the full set of effects”.

Powered by article was written by Larry Elliott, for on Tuesday 26th April 2016 18.48 Europe/ © Guardian News and Media Limited 2010