I must confess to being just a little baffled about the long-term direction of the government’s tax raising strategy, although it is clear that the tax take is going upwards.
To be fair, this is a little bit vexatious because we all know perfectly well where tax is heading and the take is very much heading north.
As we approach the Spring Statement - promising to be reassuringly dull - it’s worth a look at what’s happening to tax and taxpayers generally and it’s not good news.
Tax considerations are often at the heart of Financial Planning and the inexorable rise in taxation under the last two governments is pretty bad news for tax payers who are finding more and more of their hard-earned cash syphoned off in the Treasury’s direction. That's less money to spend and save and that has long term implications.
For the latest figures I'm indebted to the analysis of tax data from Hargreaves Lansdown. These show particularly challenging news for higher rate taxpayers.
These are some of the key tax figures since tax thresholds were frozen in 2021/22 (according to Hargreaves Lansdown/HMRC data):
• Higher rate taxpayer numbers have climbed by 2.65m to 7.08m
• There are 1.23m additional rate taxpayers, up 710,000
• There are an estimated 30.4m basic rate tax taxpayers, up 3m since the 21/22 freeze
And it goes on but should all this worry us?
The likelihood is that these figures will rise much higher over the next few years with thresholds frozen until April 2031 (six years away). Originally, of course, thresholds were due to be frozen only until 2028.
By 2031 it’s not unlikely there could be 10m higher rate tax payers, one in four of all taxpayers. Was higher rate tax really intended for a quarter of the population?
Most pundits have assumed this is a one-off increase in taxation pay for the cost of Covid measures and the like. I’m not so so sure. I believe we could well be seeing a generational shift to a much higher tax take from the population. The addition of Inheritance Tax on unused pensions from April 2027 underlines the shift. Government simply wants to take more of earnings.
Some will say that if that leads to better public services and supports the NHS and other state care services that’s a price worth paying. Others will see it as government abusing its power to take more of people’s earnings without showing much in return.
For Financial Planners the changes will likely mean much more business as clients, and future clients, wake up to the fact that without better tax planning more of their income will be taken by the government.
Ultimately, however, the government will have scale back its tax grab to avoid removing the incentives to work but that will take time. It will be a difficult balancing act to get right.
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Kevin O’Donnell is editor of Financial Planning Today and a journalist with 40 years of experience. This topical comment on the Financial Planning news appears most weeks, usually on Fridays but occasionally other days. Email:
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