Where does our tax money go?

Find out where your tax money goes and how it is spent.

In the UK, anyone who earns more than £12,500 during the 2020/2021 financial year should pay income tax (though it’s worth being aware of tax-free interest that you would earn through an ISA). For those that do, it might feel like you’re losing money every month without knowing where it’s going.

That’s why we’ve taken a look at where the UK’s tax revenue comes from and how this money is distributed. In 2020/2021, it’s estimated that the government’s public spending will total £928 billion, with the most being spent on social protection at £285 billion.

Taxpayers in the UK

HM Treasury has calculated that in 2018/2019, 31.4 million Brits paid income tax, a record high since 1975. This is because unemployment rates were historically low, with only 4% of the UK’s population out of work.

The number of taxpayers per region

Region 2017/2018 2018/2019 2019/2020 2020/2021
West Midlands 2,600,000 2,630,000 2,600,000 2,660,000
East Midlands 2,210,000 2,240,000 2,220,000 2,300,000
Yorkshire and the Humber 2,440,000 2,470,000 2,440,000 2,500,000
North West 3,290,000 3,320,000 3,290,000 3,370,000
North East 1,150,000 1,160,000 1,140,000 1,160,000
East of England 3,050,000 3,080,000 3,060,000 3,180,000
London 4,230,000 4,290,000 4,260,000 4,340,000
South East 4,680,000 4,730,000 4,700,000 4,790,000
South West 2,730,000 2,770,000 2,740,000 2,850,000
Wales 1,380,000 1,400,000 1,380,000 1,390,000
Scotland 2,600,000 2,630,000 2,600,000 2,630,000
Northern Ireland 740,000 747,000 739,000 789,999

How is income tax calculated?

Each financial year runs from April to April, so when calculating tax, you should always count April as the first month and March as the last. Each year, HM Treasury considers the value of the pound as well as the cost of living when setting tax limits and thresholds, which means that these tend to differ every year. This is to ensure that they are set at a fair level.

  • The personal allowance (tax-free income) in 2020/2021 is the same as last year at £12,500. This is 5.5% higher than it was in 2018/2019 (£11,851) and is set to increase to £13,030 in 2021/2022.
  • A basic tax rate of 20% applies to everyone who earns between £12,501 and £50,000. This upper limit is 7.9% higher than it was in 2018/2019 (£46,351).
  • If you make more than £50,000 in 2020/2021, you qualify for the higher rate threshold, which means that you need to pay 40% tax on any income you earn over this amount.
  • If you make over £150,000 per year, you’ll pay an additional rate of 45% tax on any income you earn over this amount, which remains unchanged from last year.

£306.97 per month

is the amount of tax paid by someone on a £30,918 salary (the UK’s average annual wage in 2019).

What else do we pay tax on?

But it’s not just our income that’s taxed to pay for services like schools and hospitals. Here’s a list of things that we all pay tax on every day:

  • National insurance
  • Pensions and savings tax
  • Property and council tax
  • Transport tax (fuel duty, vans, company vehicles, etc)
  • Energy tax
  • Environmental tax (single-use plastics, plastic packaging)
  • Indirect tax (alcohol, tobacco and gaming)
  • Value added tax (VAT)

So how much tax revenue does the UK make?

Overall, it’s been calculated that tax revenue will total £873 billion in 2020/2021, £63 billion more than in 2019/2020 (£810 billion). The biggest increase in revenue is expected to come from “other non-taxes”, which includes interest and dividends, gross operating surplus and other smaller non-tax receipts. Other non-taxes is estimated to increase by 61% this tax year, from bringing in £54 billion in 2019/2020 to £87 billion in 2020/2021.

HM Treasury is expecting £15 billion more this year (+8%) from income taxes and £5 billion more (+3%) from VAT taxes. Revenue from national insurance contributions will also increase by 6%, from £142 billion to £150 billion.

Tax revenue 2020/2021

Revenue source Income
Income tax £208 billion
VAT £161 billion
National insurance contributions £150 billion
Other taxes £91 billion
Other non-taxes £87 billion
Corporation tax £58 billion
Excise duties £48 billion
Council tax £38 billion
Business rates £32 billion

Where does the money go?

Public spending is expected to be £928 billion, £86 billion more than it was last year (£842 billion). This is £55 billion more than what the tax revenue will be this year, meaning that the HM Treasury has planned to use more money than what it has coming in. This is most probably due to COVID-19 and the cost of covering the NHS, as well as other help packages that the government has created to help the Brits and companies stay afloat.

This year, the biggest spend increase will be on net debt interest, which will see a 30% increase from £43 billion in 2019/2020 to £56 billion in 2020/2021. The biggest spending overall will be on social protection, which will get £285 billion to work with this year, £29 billion more than last year.

Public spending 2020/2021

Area Amount spent
Social protection £285 billion
Health £178 billion
Education £116 billion
Other (including EU transactions) £58 billion
Net debt interest £56 billion
Defence £55 billion
Transport £44 billion
Public order and safety £38 billion
Personal social services £36 billion
Housing and environment £32 billion
Industry, agriculture and employment £30 billion

Tax money during the coronavirus pandemic

The UK government has stepped up with financial help for companies and individuals in need during the coronavirus crisis. Here are some of the helpful actions that the government has taken to help:

Guaranteed business loans
The government made an initial £330 billion available to help businesses that are struggling.

Public services support
£30 billion was added to support public services such as the NHS, individuals and businesses.

The Hardship Fund
The government increased “The Fund” by 1,000% in April 2020 to help those in need. During the normal tax year, The Fund has £500,000 to help very low paid workers who are temporarily out of work as a result of crime. Since the effects of COVID-19 have been increasing the number of those without a steady income, £500 million have been made available to help provide council tax relief to those who need it the most.

Mortgage or rental holiday
To avoid evictions during the crisis, homeowners and tenants can apply to take a break from their rent and mortgage payments for three months.

Statutory Sick Pay (SSP)
Normally, when an employee takes a leave of absence due to sickness, the employer pays Statutory Sick Pay (SSP) to the employee for up to 28 weeks. If you run a small or medium-sized business and one of your employees needs SSP, you might be eligible to reclaim the costs.

Business Rates bill
Those who run a small business pay the Business Rates bill, which is a tax on the property. During the COVID-19 crisis, owners will get a revised bill with 100% relief. Those who are nursery owners will be entitled to a 100% relief for the next year.

Retail, hospitality and leisure sector grant
Those who own a business within retail, hospitality or leisure will get a cash grant of at least £15,000, up to £25,000, depending on the value of their property. If you own any of these businesses and need a loan for up to £5 million, the loan will be interest-free for the first six months.

Tax relief
Those who are self-employed or own a business can apply for tax relief. This way, the money can instead be put back into the business to help make up for the lack of customers and sales.

When don’t we pay tax?

There are a variety of circumstances in which Brits aren’t expected to pay any tax at all:

  • If you receive income from a small business, the first £1,000 of income you earn is called a “trading allowance” and is tax-free.
  • Similarly, the first £1,000 you make from subletting your property is tax-free.
  • If you’re subletting a room using the Rent a Room Scheme, you don’t need to pay tax on the money earned from your lodger, up to a total of £7,500 per year.
  • Profits made from ISA accounts are also not taxed.
  • Dividends from companies you’ve invested in are tax-free up to £2,000.
  • State benefits like the housing benefit, income support and the disability living allowance aren’t taxed.
  • Premium bonds and National Lottery winnings are also not taxed.

The tax gap

Every year, HM Treasury works out roughly how much should be paid in taxes. Then at the end of the year, it calculates how much was actually paid. So, why is the amount of tax that’s actually paid lower than the amount that should be paid? This comes down to a number of factors, including criminality, evasion and tax avoidance.

There are also less nefarious reasons for the tax gap, as taxpayers may mistakenly report the wrong amount on which they will be paying tax in the coming year. In 2017/2018, the tax gap was £35 billion pounds, which makes up 5.6% of all tax liabilities. The £35 billion that was missing in 2017/2018 was made up of £14 billion missing from small businesses, £4.9 billion due to criminal activity and £3.9 billion missing from individual income tax.

Reason Tax gap 2017/2018
Failure to take reasonable care 18%
Legal interpretation 18%
Evasion 15%
Criminal attacks 14%
Non-payment 11%
Errors 10%
Hidden economy 9%
Avoidance 5%

Click here for more research. For all media enquiries, please contact:

Matt Mckenna
UK Communications Manager
T: +44 20 8191 8806
matt.mckenna@finder.com@MichHutchison/in/matthewmckenna2

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