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How will we pay for NHS commitments?

How will we pay for NHS commitments?

The Office for Budget Responsibility (OBR) announced this week that meeting the government’s commitment to pay £20.5bn extra a year towards the NHS by 2023 could lead to significantly higher taxes. Our own analysis had reached a similar conclusion.

Recent surveys suggest that the majority would be prepared to pay an extra penny in the pound on income tax to help reach the NHS funding target. But that is unlikely to plug the gap. So when does increasing tax become counterproductive? When does the working population collectively down tools and say that the extra income after tax is not worth the extra hours worked?

Types of tax compared

Income tax makes up only a quarter of tax revenue (see Figure one). As Figure two shows, a 1p increase in the basic rate of tax is expected to generate just £4.85bn p.a. by 2021. A similar increase in the higher rate of tax could generate £1.25bn. A 1p increase in the additional rate of tax would generate only £0.19bn. So the 1p tax rise people say they are comfortable with will get us only a third of the way.

There are, of course, other sources of income available to the government. Tax evasion and tax avoidance add up to £7bn of potentially lost revenue (about 1% of tax liabilities). There has been a steady downward trend in the avoidance tax gap – from £4.9bn in 2005-6 to £1.7bn in 2016-17 – but the low-hanging fruit has probably been picked.

VAT is at an historic high of 20% and it seems unlikely that any Chancellor would want to raise this tax.

Corporation tax rates have fallen from 30% a decade ago to 19% today. This is a trend that could be reversed (corporation tax is 30% in Germany, 33% in France and 24% in Italy). But how willing would the government be to increase a tax on employers when it needs Britain, post-Brexit, to be more competitive than ever? Arguably there is room to squeeze companies like Amazon, which paid just £15m tax on European revenues of £19.5bn in 2016, but the government has had this problem for some time without finding a solution.

It is not difficult to conclude from this that if we are to find £20.5bn a year by 2023 without cutting expenditure or borrowing more, personal taxes are likely to have to rise quite significantly, which is going to be difficult to implement (remember the U-turns on National Insurance in the March 2017 budget and on election manifesto plans to pay for later-life care).

So can we afford more taxes? And who should pay?

The problem with increasing taxes is that it can be counterproductive – a point is eventually reached where raising taxes actually reduces tax revenue. This may be evidenced soon by the increase in stamp duty on homes.

Higher taxes can reduce spending capacity, encourage tax avoidance, demotivate entrepreneurs, deter foreign investment and persuade some of our brightest talents to leave the country.

How does Britain compare against our global competitors?

If competition is a fear, it might be helpful to look at how heavily taxed Britons are relative to those who live in competitor nations. The OECD’s 2018 Taxing Wages report compares the ‘tax wedge” – the difference between before-tax and after-tax wages – for all 35 OECD members. It shows that tax rates in the UK over various household types and incomes are broadly similar to the OECD average. Unfortunately, the OECD does not produce figures for the highest earners.[i]

Can the rich be squeezed a bit more?

It is often quoted that the top 1% pay 28% of the total income tax bill. This suggests that they are carrying a big proportion of the burden. Looked at another way, though, the picture is a little different. Our calculations on ONS data show that if you take into account all taxes – direct and indirect, such as VAT and duties – the top 10% pay on average 34% of their gross income (which includes cash benefits) in tax. The proportion is pretty much the same across all income deciles with the exception of the very poorest of UK society (the bottom decile pay 49% of their gross income in taxes on average).

It is impossible to say where tax rises are going to come from, but Philip Hammond may well think the wealthy can afford to pay more – but not necessarily all through income tax hikes. (We issued a warning last month about CGT increases.)

Prepare for stealth taxes. It would seem that the Chancellor will have to resort to some creative thinking if he is to generate the required extra income and still retain the backing of Parliament and voters.

[i] The OECD Taxing Wages report looks at the tax wedge for household incomes at 67%, 100% and 167% of the average income in each country. In the 2018 report 167% of the average income was £63,807, with the average being £38,208.


You should not act on the content of this market commentary without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made of given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.

The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. Fluctuations in interest rates may affect the value of your investment. The levels of taxations and tax reliefs depend on individual circumstances and may change. You should be aware that past performance is no guarantee of future performance.

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