July, 2013

Do you pay more of your income in tax than ever before?

At what point in your life were you paying the highest proportion of your income in tax? In the 1970s? The 1980s? In a recession? Or now?

Since the 1960s, the Office of National Statistics has analysed how much of your income you are paying in taxes. And, this analysis is not just looking at your income tax. Research has considered the impact of both direct taxes and indirect taxes on household incomes.

  • Direct taxes include: Income tax, National Insurance contributions, Capital Gains tax, Inheritance tax
  • Indirect taxes include VAT, fuel duty, tax on alcohol and tobacco, Stamp Duty

The graph below shows the ‘effective’ tax rate over the last 50 years. The ‘effective’ tax rate is the total amount paid by households in both direct and indirect taxes as a percentage of their gross income.
Effective tax rate

In 1961, after accounting for inflation, the average household paid approximately £4,000 in direct and indirect taxes, compared with £12,900 in 2011/12.

Why you’ve paid a different proportion of your income in tax since the 1960s

Since the 1970s, the general pattern of change in headline rates of tax has been for reductions in income tax, and increasing Employee’s National Insurance contributions and VAT. However, many other factors, including the income levels at which income tax and National Insurance contributions are levied, as well as changing working patterns, household compositions and demographics, have also had substantial influence on how these taxes have affected average household incomes.

The effective tax rate grew during the 1960s and 1970s from 28.4 per cent in 1961 to a peak of 39.4 per cent in 1983. However, since then the trend has been downward, reaching a low of 32.8 per cent in 2009/10, before increasing slightly over the last two years to 34.6 per cent. This means that the average household in the UK now pays just over a third of their gross income in direct and indirect taxes.

These figures do, however, hide another important fact: namely that the richest and poorest households in the UK are paying almost exactly the same proportion of their gross income in taxes. The most recent figures reveal that the poorest households pay 36.6 per cent of their income in taxes compared to the richest households who pay 35.5 per cent.

So, if you have been paying taxes for years then you were contributing a higher percentage of your income in 1983 than at any other time. But, the figure is gradually creeping up again. So, is the amount of tax you pay fair? Should richer households pay a higher proportion of their income in taxes than poorer households? Please share your thoughts below.