Are workers facing ‘record tax bills’?

“Working people are facing record tax bills at the moment, taxes are at a record high.”

During an appearance last week on BBC’s Question Time [18:50], Labour’s shadow education secretary Bridget Phillipson claimed “working people” are facing “record tax bills”, with taxes “at a record high”.

We’ve asked the Labour party what Ms Phillipson’s claim is based on, and will update this article if we receive a response.

Senior Labour party figures have frequently claimed that taxes are at or near a record, or 70-year, high. As we explained last week, in the 2022/23 financial year the so-called ‘tax burden’—which refers to tax revenues as a percentage of gross domestic product (GDP)—was at the highest level in over 70 years. In the last financial year it fell slightly, but it is forecast to increase over each of the next five years to the highest level since 1948 (when current records began).

However, these figures are for total tax revenue, which includes a wide range of taxes including some such as corporation tax which aren’t paid by individuals, so don’t necessarily tell us whether workers are facing “record tax bills”. And different data on the effective personal tax rate for the average worker (based on the rate of income tax and National Insurance) paints a different picture.  

‘Average earner’ has a historically low effective personal tax rate

Both the Institute for Fiscal Studies (IFS) and the Resolution Foundation think tanks have pointed out in recent months that the effective personal tax rate for the “average earner” or “typical employee” is currently the lowest since 1975.

The IFS says: “The basic rate of income tax has come down from 35 per cent to 20 per cent over the past 50 years. The tax-free allowance is being squeezed, but it is still at historically high levels following big increases during the 2010s. And while, at eight per cent, the main employee element of National Insurance is higher than it was in the 1970s, it is lower than at any time since 1982.”

Since 2021, ongoing freezes to the threshold at which people begin paying National Insurance contributions and income tax have increased people’s taxable income, in what’s known as “fiscal drag”. But for the average earner, recent reductions in the main rate of National Insurance contributions have offset this. 

In 2024/25 someone on the average full-time salary of about £35,000 can expect to pay about £900 less in tax than they would have if National Insurance rates had remained the same, and even once the impact of all income tax and National Insurance changes since 2021 are factored in, the IFS says the average worker stands to save £340 in 2024/25

The Resolution Foundation forecasts that over the next few years the effective personal tax rate for the average earner will increase slightly from the current rate, but will remain low by historical records.

These figures look at income tax and National Insurance contributions. They don’t include some other taxes such as council tax or the high income child benefit charge, or indirect taxes such as VAT or fuel duty. And as noted above, they also don’t include taxes which aren’t levied on individuals, such as corporation tax.  

Some have seen their effective personal tax rate rise in recent years

Changes to income tax and National Insurance over the course of this Parliament have resulted in savings for people earning between £26,000 and £60,000 this year, but those earning less or more than this are set to pay more tax, as for them the National Insurance reductions do not offset the impact of the threshold freezes.

In particular, the highest earners and pensioners are paying more tax as a result of the government’s changes, and overall the net amount of revenue the government receives from personal taxes is set to increase further, by a net £20 billion by 2028-29.

Stuart Adam, a senior economist at the IFS, told Full Fact: “Overall tax as a share of national income is at its highest for 75 years, yet direct tax as a share of the median earner's income is at its lowest for 50 years. 

“There are lots of reasons those measures can differ: indirect and business taxes, trends in employment, taxes on pensioners and other non-workers, and so on. But one important reason is that we get much more tax from those on high incomes nowadays— a trend that has continued under the Conservatives.”

Image courtesy of Image_of_Money