COVID picks the pockets of the taxman: tax falls for the first time since the financial crisis
Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on HMRC’s publication of the March tax collection statistics, which shows that tax has fallen for first time since the financial crisis, and COVID has reduced tax receipts for 2020-21.
- In 2020/21 tax receipts were down 7.8% or £49.1 billion from a year earlier to £584.3 billion. This is the first fall since the financial crisis of 2008-2010.
- Income tax and capital gains tax rose far slower than expected, while VAT, stamp duty and fuel duty all fell. Alcohol duty and inheritance tax bucked the trend.
- Stamp duty dropped for the third year running, partly as a result of first-time-buyers’ relief. However, it peaked at the end of the year: March saw record stamp duty – the highest monthly receipts since the tax was introduced in 2003, as people rushed for the original stamp duty holiday deadline.
Sarah Coles comments:
“COVID has picked the pockets of the taxman. With the economy closed for business for large chunks of the year, and tax breaks being hurried through by the Chancellor to help get the country back on its feet, the Treasury took almost £50 billion less in tax.
“Job losses, lower wages and furlough meant income taxes fell, while less spending overall squashed VAT, and travel restrictions killed fuel duty and air passenger duty.
“Stamp duty had a rollercoaster ride, slumping to a real low when the housing market closed during the first lockdown, and then soaring to a record high as people rushed purchases to get in ahead of the stamp duty holiday deadline. Overall, however, it was down.
“A few taxes defied the trend. Our commitment to wine o’clock and the gin trend kept alcohol duty up, despite a fall in the consumption of pub pints. And the higher number of deaths during the year meant more estates paying inheritance tax.
“But while people who were able to spend less during the crisis will have felt the benefit of lower taxes on spending, we’re all likely to feel the impact of the flip side of this particular coin.
“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.”
- Income tax, NI, capital gains tax and the apprenticeship levy rose slightly to £352.1 billion. This was less than expected, partly because of lower business activity, and partly because businesses delayed or didn’t pay their taxes.
- VAT fell from £129.9 billion a year earlier to £101.1 billion – partly because of the VAT deferment brought in to help businesses cope with the pandemic, partly because of the temporary 5% rate introduced for hospitality, and partly because we bought less.
- Fuel duty fell from £27.6 billion to £20.9 billion and air passenger duty slumped to £0.6 billion – down from £3.6 billion a year earlier – because of travel restrictions.
- Alcohol duty bounced back from £11.8 billion a year earlier to £12.1 billion, as wine and spirit spending more than offset the fall in beer and cider duty.
- Inheritance tax has risen back to £5.3 billion – close to its peak in 2018/19 of £5.4 billion, this is most likely to be because of the higher death rate. It fell back in the intervening year because of the rise in the residence nil rate band, and possibly because people had rushed through probate the previous year over concerns about higher probate fees on the way.
Kindly shared by Hargreaves Lansdown
Main photo courtesy of Pixabay