Why we paid £50bn less tax last year
Total tax receipts for the 2020-21 tax year came to £584.3bn, a massive £49.1bn lower than the previous tax year.
The biggest factor in this fall was VAT, with receipts down by £28.8bn over the year. This is in large part down to the reduced spending seen across the country ‒ with shops and hospitality closed, there were fewer ways for us to spend money, and therefore pay VAT on that spending.
There were also significant drops in corporation tax (11.4bn), stamp duty (£2.9bn) and air passenger duty (£3.1bn). The government introduced a stamp duty holiday last year in order to give the property market a boost, which has now been extended, and is at the heart of that revenue fall.
A drop in air passenger duty is also to be expected given so few flights have taken place, though the government has also pledged to revamp the tax to boost domestic flights.
However, receipts in other areas actually increased over the year. For example, the money the taxman brought in from income tax, capital gains tax and National Insurance contributions rose by £3.2bn, while the money raised from tobacco duties jumped £1.2bn.
Cashing in on capital gains
NFU Mutual pointed out that capital gains tax (CGT) is becoming a serious earner for the taxman, with £10.611bn brought in last year, a jump of £785m from the previous tax year.
What’s more, it means the CGT receipts have jumped by 26% over the last three years, and nearly tripled over the last decade.
This comes on top of the fact that Rishi Sunak, the Chancellor, last year instructed the Office of Tax Simplification to look into ways it can be reformed, which led to suggestions such as a dramatic drop in the annual tax-free allowance.
Sean McCann, chartered financial planner at NFU Mutual, said: “Property prices have rocketed, in part due to the stamp duty holiday, and this has likely contributed to the increase in CGT the government has collected as some second property and buy to let owners have sold up.
“A volatile year in the stock market with large fluctuations may have encouraged some investors to sell, realising gains that would have been taxed. The lifetime limit of Entrepreneurs’ Relief was reduced from £10m to £1m last year too, which would have led to a bigger tax bill for those selling businesses.”
Brace yourself for tax rises
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said that the pandemic had “picked the pockets” of the taxman, but warned this may not continue for long.
She said: “The Treasury is reeling from the lower tax take at a time of record spending. It means that once the worst economic effects of the crisis have passed, the government will be keen to fill its coffers again, and the threat of higher taxes and lower spending is looming ever-larger.
“It pays to stay one step ahead of whatever tax pain the government has planned, and think about protecting yourself from paying over-the-odds. If you haven’t already taken advantage of this year’s ISA allowance, and considered making the most of your annual pension contributions, it’s worth doing so while you still can.”