Monahans partner on the tax return deadline and fiscal drag

Another tax milestone is reached as the 31 January 2023 tax return submission deadline passes and the Treasury’s coffers are swelled by tax receipts due and paid by the end of the month.

The real question is by how much have those coffers been swelled? Monahans has discussed before that the result of Jeremy Hunt’s Autumn Statement in 2022 would be that we will all pay more tax. But I am not sure any of us were aware just how much. The tax receipt calculations for 2021/22 (the last tax year) are, quite frankly, eye watering and this is before we know how much was actually paid in January. Or how Hunt’s Budget changes will pan out.

As for an attempt to answer that question, here goes.

The Office for Budget Responsibility (OBR) has stated that in the 2021/22 tax year (sweep up payments from which would have been made in January 2023), £40bn more than expected has been collected in income tax and National Insurance. You read that right: ‘£40bn more than expected. ‘Fiscal drag’ occurs when increases in tax-free or higher rate tax thresholds fail to keep pace with inflation or pay rises, resulting in workers handing more of their earnings to the taxman. It has long been a concept close to the hearts of many chancellors’ of any political colours.

I suppose the frightening part of this £40bn increased tax take is £12bn (30%) has been collected as pay rises have jumped in a bid to meet inflation and therefore more individual tax payers have been forced into higher tax brackets – fiscal drag in operation and coming to a payslip near you.

In simple terms, half the growth in income tax receipts in 2020 and 2021 was due to more individuals being dragged into higher tax bands. And dare I remind you this is before these bands were frozen by Hunt until 2028 – only 5 more years to go then.

With a 58% increase in corporation tax receipts for 2021/22, when compared to the March 2021 forecast – lest we forget the six percent increase in Corporation Tax from 1 April 2023 – not only will the government get even more, but there’ll be even less for the owners of all companies, small or large, to take as a reward for their labours.

I’d say the government has done pretty well out of the post pandemic recovery. Might I suggest that individual taxpayers and those running small businesses have done rather less well.

And, for as long as inflation is running at levels unseen in 30 years, with tax thresholds and allowances frozen, the government will continue to do well. All eyes will be on the March Budget for the next round of, “We’re all in this together”. The only question I have is, “But are we, Jeremy, because looking at these numbers it just doesn’t quite feel like it?”

Dominic Bourquin is partner for Tax Consultancy and Corporate Finance at Monahans, the south west’s leading accountancy and business advisory firm.