UK tax burden is highest on record

Wages are rising, which is normally a good thing, but our tax bills are swelling too like never before. Alice Guy explains why and how taxes today compare to during post-war Britain.

Feeling the pinch? It might be partly due to your tax bill as we now have the highest tax burden on record since before the 1950s. And depressingly Britain’s tax bill is due to continue rising in the future and reach 36.9% of gross domestic product (GDP) by the tax year 2023-24. That compares with a previous high of 35.1% in 1969 and a low point of 28.3% in 1993.

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As a country, our current tax bill is even higher than it was in the 1970s, a time when the highest rate of income tax was 83% compared to 45% currently.

How do we measure Britain’s tax bill?

The tax burden on the country is measured by dividing the total tax receipts by GDP (the total income of the UK). That gives us a ratio to show how much tax we pay as a country. It’s a bit like the tax rate for the whole of Britain.

Why are taxes rising?

Taxes are rising partly due to an ageing population and increasing health and pension costs as more of us live for longer. By 2050, the proportion of the UK population over 65 years old is projected to reach nearly 24%, up from 17% in 2012, according to the Office for National Statistics (ONS).

Then there’s also the small matter of repaying Covid debts and total government spending estimated at £376 billion: that’s over £5,000 for every woman, man and child in the UK.

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But it’s not just costs that are pushing the government to raise taxes, it’s also the economic situation. There’s a risk that lowering taxes when inflation is high could further stoke the inflationary fires. It’s something Liz Truss ignored at her peril when she attempted to lower taxes in last September’s doomed mini-budget. Once inflation drops back, the government may have a little more leeway to ease the tax burden.

Rising tax burden

The tax burden has been steadily rising since 2012 when George Osborne was chancellor. Then, the UK’s tax burden was 32.8%. That crept up to 33.1% in 2019, but leapt to 34.1% in 2020, to 36.8% by 2022, and is projected to hit 37.7% by 2026, according to latest Office for Budget Responsibility forecasts.

If we look at tax in a different way and work out the tax average per head in the UK, the results are even more staggering. In 1953 we paid just over £2,000 for every woman, man and child, adjusted for inflation. That amount rose slowly through the 1950s and 1960s, hitting £5,000 by 1978, £9,000 in 1997, £12,000 in 2008 and just over £13,000 in 2022. The rise was mainly due to higher wages: the average wage, adjusted for inflation, was around £7,000 in 1956 compared to around £30,000 in 2021.

But the amount of tax we pay per person hasn’t actually risen much since 2010, and that’s part of the problem. Average earnings haven’t risen much since 2010 once we adjust for inflation and we’ve had long-term wage stagnation since the financial crash. That causes a problem for the government and, with costs still rising, the chancellor’s options are either to borrow more, tax more or a bit of both.

Why are taxes higher than the 1970s?

If the highest rate of income tax in the 1970s was 83%, then why do we currently have a higher tax bill as a country?

It’s partly due to fiscal drag, which means that more of us are paying basic rate and higher-rate tax as the years go by.

Fiscal drag works by freezing income tax thresholds, so workers pay tax on more of their income as their pay rises but the tax thresholds stay the same. For example, someone working part time and earning £12,000 will currently pay no income tax, but they will pay 32% tax (20% income tax and 12% National Insurance) on around £2,500 of their income by 2028 as income tax thresholds remain frozen. Their pay will have risen to £14,500 due to inflation, but they won’t feel any richer in real terms.

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When it comes to income tax we always think about the tax rate, but the tax thresholds are just as important. In 1979, the highest rate of income tax was 60%, but in contrast a married man on the average wage would only pay tax on 40% of his income: yes, they did have different tax bands for men and women! This compares to 2022 when someone on the average wage would pay income tax on around 61% of their income.

Like boiling a frog, the slowly, slowly nature of fiscal drag means that we’re gradually paying more tax each year without really noticing. It leaves us feeling poorer in real terms, due to a bigger tax burden as well as high inflation. Fiscal drag is particularly effective in times of high inflation as the thresholds stay the same while wages rise more quickly.

And unless something drastic changes, it looks like we’ll all be paying a lot more tax for some time to come.