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Stealthy hippo | AccountingWEB | The rising wealth of stealth tax
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Record tax receipts reveal impact of stealth taxes

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HMRC’s latest monthly tax receipt statistics have laid bare the impact of stealth taxes. Chris Etherington from RSM argues that these figures should make for uncomfortable reading for the Chancellor in an election year. 

26th Apr 2024
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It’s been a record year for HMRC, with provisional figures showing the department collected £827.7bn worth of tax in the latest financial period - an almost 5% increase on the prior period. Also on the rise though are stealth taxes.

These personal taxes cover income tax, class 1 (employee), class 2 and class 4 national insurance contributions (NICs), capital gains tax (CGT) and inheritance tax (IHT).

The latest release of monthly tax receipts show that the total amount paid to the Treasury across these various income streams in the year to March 2024 hit £361bn - another record, surpassing the year before by nearly £20bn and representing a 5.8% increase.

Hitting wallets

Speaking to AccountingWEB Chris Etherington, a private client partner at RSM, said the numbers are about “looking at the taxes that hit wallets in an obvious way – how the cost of living is impacting on people and how these personal taxes are playing into that”.

“We've seen significant growth in that area over the last few years in particular. The focus of the government has been trying to raise revenues, which has ultimately been through the freezing of allowances, reducing allowances and obviously stealth taxes.

“Yes, there's been a sort of short term boost to pay packages in the last few months as a result of National Insurance measures but there's a huge issue in terms of stealth taxes and the impact that's having on their incomes that people may not be aware of.

“It’s why they’re badged as stealth taxes because while you may feel poor, you may not tangibly understand why that is, and this brings it into a stark reality.”

Uncomfortable reading

RSM noted that the data makes for “uncomfortable reading” for Jeremy Hunt, with Etherington noting that the trouble the Chancellor’s got is that “there hasn't been enough fiscal headroom for him to do much else, other than the measures that he has taken”.

“If he takes too dramatic a step in relation to trying to reduce the tax burden, he could spook markets – which obviously happened with the doomed mini-Budget.”

Etherington added that Hunt “doesn't want to risk raising inflation as well”.

“So if you were, for example, to cut income tax rather than national insurance, that could have been seen as inflationary by the OBR. The benefit of cutting national insurance instead has been that it's seen as adding to productivity by the OBR and therefore doesn’t cause that problem.

“However, it’s a drop in the ocean in terms of the real problem.”

An incentive and a disincentive

Etherington believes that what really needs to happen over the longer term for people to “feel the benefit of tax cuts” is for it to be “more linked to increases in personal allowance and the base rate band, ie, the point at which individuals pay higher rate tax”.

“A lot more individuals are being dragged into the 40% tax rate and - certainly for those who are working families on above average salaries - they're going to be starting to feel the pinch as a result.

“It’s arguably a disincentive for some people to be self-employed, for example. They may think ‘Why should I work more if I’m going to have more tax taken off me?’

“Tax can obviously be an incentive for people but also a disincentive. So it's an important balance to get right and at the moment, it only seems to be going in one direction despite the measures that the Chancellor is taking. But he is constrained by the economy.”

Not a pretty picture

In the four tax years since the last election, the personal tax burden has increased by £93bn from £268bn in the year to 31 March 2020.

“Obviously we've had wage inflation in response to the broader inflation issues that we faced but certainly, over the last few years, it has outpaced that and perhaps is starting to slow,” said Etherington.

“We're seeing increases across the board – so it’s not just income taxes. The dramatic increases have been to things like inheritance tax and capital gains tax over a relatively short period of time, and that reflects the asset inflation that we've seen as well, combined with the fact that we're reducing or freezing the corresponding allowances.”

Etherington notes that there are “wider issues here as well – it increases the burden on HMRC”.

“We have these allowances to simplify the system and what we're doing is complicating it, dragging more people potentially into the tax net, putting a burden - a further burden - on what is an already creaking HMRC support service because they're simply under-resourced and under-funded.

“It doesn't paint a pretty picture for the Chancellor in a number of ways.”

HMRC investment is key

On whether further investment in HMRC may help the issue, Etherington believes “it’s key”.

“I think we need a fully functional tax authority to be able to generate the revenues that are appropriately due, otherwise the tax gap’s going to increase, but equally it effectively decreases the incentive for people to do things the right way if they don't have an authority that's going to be policing the system.

“The vast majority of taxpayers will do the right thing and will want to be disclosing the right amounts but inadvertently, because they're unable to get the support that's necessary to manage their affairs on what is one of the most complex tax systems in the world, they’re going to get things wrong through error and mistake.

“So it's vital to have the appropriate support in place.”

Despite the need for investment, he doesn’t think “throwing money at the problem” is the solution.

“There are inherent issues within HMRC and we need to get the training right. We need to be able to attract the right calibre of staff to be able to deal with some of the complex issues.

“There are huge numbers of really talented people at HMRC but morale there is likely to be really low due to the fact that they have the burden and these demands put on them.”

Poaching ideas

Etherington is not expecting the tax burden to come down anytime soon, adding that it is “likely to run into the course of the next parliament as well, regardless of which flavour of government we have”.

“To some extent, there may even be further tax increases in certain ways and both parties, as part of the election, are likely to have pledges for spending. Those will need to be funded but where are they going to get that from? That's probably where the interesting elements are going to be in the next six months or so.

“For example, if the Labour Party was to try to raise further revenues and they put that into the public domain, there's every chance that the Chancellor could call another Budget ahead of an election and effectively do what he's done previously - poach some of the best of ideas that Rachel Reeves has come up with.

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By FactChecker
26th Apr 2024 13:42

"It’s been a record year for HMRC, with provisional figures showing the department collected £827.7bn worth of tax in the latest financial period - an almost 5% increase on the prior period"

Even old codgers down the pub understand the impact of inflation on their purchasing power - and many understand the concept of 'adjusted for inflation' when comparing price changes over time.
So why doesn't Chris Etherington?

Stealth taxes are a real thing ... but that increase in HMRC's collection is wholly wiped out by inflation, so its supposed correlation with (let alone causation by) stealth taxes is pure vapour.

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Replying to FactChecker:
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By johnjenkins
29th Apr 2024 10:40

The result of which is "stagnation" or as some might call it, a mild recession. I really do feel for the next Government, they haven't got a cat in hell's chance of getting out of this one.

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Replying to FactChecker:
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By [email protected]
29th Apr 2024 11:01

That is, on the face of it, fair comment in relation to the numbers quoted in this piece. A 5.8% annual increase in the personal tax revenues broadly matches the latest annual growth in employees' average total earnings (including bonuses) and would appear neutral given income tax and NICs are the key drivers behind these figures. Annual CPI inflation to March 2024 was lower at 3.2%.

However, one might have thought there would have been a reduction in personal tax receipts given the National Insurance contributions (NIC) cuts in the Autumn Statement. Class 1 NIC revenues did fall by £4.1bn during the year and CGT revenues also fell by nearly £1.5bn with the property market conditions.

Those decreases have been offset by a 10% increase in income tax receipts over the year, with fiscal drag and stealth taxes a factor in that as more individuals' income take them above the personal allowance and into higher tax bands. In our original analysis, we also highlighted the 4 year increase to 31 March 2024 with these personal tax revenues increasing by nearly 35% in that period (again outpacing the inflation in average earnings). As you say, stealth taxes are a real thing and would have pushed receipts up higher but for the NIC cuts.

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RLI
By lionofludesch
27th Apr 2024 10:28

I, on the other hand, smile when folk ask "Where's the money coming from? A magic money tree?"

Well, yes. Sort of.

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By mac007
29th Apr 2024 12:46

What a shame, taxing the poor and OAP's who have already paid their
taxes for 66 years to be told any income above £12,570 ( half the average UK wage ) will be taxed at 20%!!!!!!

This means not only do they have to pay unaffordable Council Tax,
but TV Licences that MP's don't have to pay, but fuel duty and vat on
all other purchases with the exception of food. They have no money left to grow the economy by making purchases with the result being
another recession. You have to thick not to understand this and Sunak
and the smarmy Hunt have bought our economy to it's knees once
again. Well done you two. Do they seriously expect pensioners, once
loyal to the Tory Party, them to vote for more of this rubbish? I don't
think so. Unfortunately, the alternative is even worse and a vote for
Remain will just put Labour in power - the spending party.

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Replying to mac007:
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By johnjenkins
29th Apr 2024 14:40

It's not a recession any more it's stagnation. We have gone past the Laffer curve. The increase in tax receipts although real has been artificially created.
Let's look at just one example. Sale of residential properties (not main residence), tax has to be paid in 60 days, bringing receipts for the taxman in real time as opposed to say 18 months.

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By Ian McTernan CTA
29th Apr 2024 12:53

Or another take on it: average wage rose by around 6% last year...so tax take on income tax will rise too.

What it's telling us is state spending is way too high and to support that we need taxes that are too high and are stifling the country.

But at least Labour have a plan to attract UHNW to the UK to grow the country...oh no, wait, they have a plan to push them out too...

I expect another cycle like the last: Labout inherit improving public finances, lowering interest rates, growing economy then increase spending like there is no tomorrow, artificially increasing growth, then it all comes crashing down just in time for the next crowd to spend years trying (in vain, mostly) to get spending under control..

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