Income tax take up 53% since tax threshold freeze

Analysis of the latest HMRC tax receipts showed employer national insurance contributions (NICs) hit £11.3bn in May, up £848m on the same month last year when the total was £10.66bn, marking an 8% rise in immediate tax costs for business.

The overall tax burden for business is on the upward trajectory, with corporation tax receipts alone up 12% to £3.31bn in May, compared with £2.96bn in 2025. When all business taxes are combined, including niche items like the diverted profits tax, energy profits levy and economic crime levy, the total for the first two months of the 2026-27 tax year was £8.6bn, up an eye watering 9.3% on the same period in 2025.

But it is not only businesses that are feeling the tax burden. PAYE employees paid £24.2bn in income tax alone in May, up 9% from £22.2bn just one year ago, undoubtedly caused by the impact of fiscal drag as more taxpayers are drawn into tax either for the first time or are being caught by the 40% tax rate.

Before thresholds were frozen in 2021-22, the May 2021 income tax bill was only £15.2bn – in just five years it has shot up by 46%. Without the 4% cut in employee NICs in early 2024 under the last government the tax burden would be even more painful.

The total monthly tax take hit £66.38bn in May 2025, bringing the total so far this year to £153.68bn, up from £143.90bn in the comparable two-month period in 2025-26 tax year.

Sarah Coles, head of personal finance at AJ Bell, said: ‘The taxman carved himself a hefty slice of our cash in May thanks to a combination of frozen thresholds and a hike in dividend tax.

‘Income tax bills have been climbing ever since thresholds were frozen in 2021-22, and the impact of this horrible stealth tax becomes more evident with each passing year.

‘Every pay rise has pushed millions of people into paying more tax, and more at higher rates. It’s why the May income tax take has risen by more than half for the month since 2021.

‘The fact that thresholds are set to stay frozen until at least 2031 means the tax pain is far from over. And it doesn’t stop with wages, because when we cross a threshold, the rate of tax we pay on savings and investments returns rises too – and the allowance for savings falls.’

VAT was down considerably on April’s figure of £20.49bn at £14.56bn in May, but year on year the story is bleaker for consumers with the number up £1.2bn for the same two-month period. On the plus side, capital gains tax (CGT) was more or less unchanged at £168m, compared to £162m last month, and well down on last year’s £232m as the fallout from a flurry of asset sales in the last tax year has fallen out of the figures for now.

High petrol and diesel costs at the pump also had an impact with an additional £200m in fuel duty with £4.3bn in total receipts for May. The chancellor’s decision to delay the increase in fuel duty, originally scheduled for September should keep these figures in check.

Sheena McGuinness, co-head of energy and natural resources at RSM UK said: ‘The price at the pump seems to spike quickly, but come down more gradually so the government delaying the planned fuel duty rise until the end of the year will still be needed to ease mounting inflationary pressures on households.’

Inheritance tax (IHT) was up slightly to £730m, marking the inexorable rise of the dreaded death tax as more estates are dragged into the system. This will only increase further when IHT on pension pots comes in unless people start reassessing their IHT planning and spending more upfront.

Borrowing on upward spiral

UK borrowing jumped more than 30% in May compared with the same month a year ago – and is higher than any May since 2020 when government spending soared due to pandemic support measures.

Danni Hewson, AJ Bell head of financial analysis, said the borrowing figures were ‘a chillingly well-timed reminder to any would-be prime minister that the bond markets matter when a country is carrying as much debt as the UK currently is’.

Debt interest hit a record high for May, and at £11.7bn it accounted for almost half of the £23.3bn borrowed by the government.

‘The last time borrowing for the month of May exceeded what was required to plug the gaps was right at the start of the pandemic when the government raided its coffers to cover the wages of millions of workers furloughed because of lockdowns,’ added Hewson.

But the rising borrowing could signal more tax rises.

Tom Goddard, an assistant manager at Blick Rothenberg warned: ‘Debt interest, public services, and benefits are all rising faster than tax receipts.

‘This ever increasing tax take is still not enough to cover government deficit, so the question of where additional revenue is to be found will occupy many of those at the Treasury, especially off the back of the UK defence investment plan likely to be published in the coming weeks.’

The latest tax and borrowing figures were released as Andy Burnham won the by-election in Makerfield with a resounding majority of more than 9,000 votes, signalling a potential leadership challenge for the PM. There are concerns any change of leadership could see the introduction of a wealth tax, something Burnham has supported in the past, although he has pledged to keep to the chancellor’s fiscal rules.

Hewson said: ‘Long-term borrowing costs have been creeping up and will be monitored closely if the anticipated Labour leadership contest gets underway.

‘Burnham has drafted in economic heavyweights to help shore up his credentials and has pledged to follow the existing fiscal rules, which includes not borrowing to fund day-to-day spending.’

Fears about a wealth tax are circulating again, with George Prior, CEO of deVere Group, warning: ‘Burnham’s success makes future tax raids on wealth appear more plausible than they did a week ago.

‘Capital gains tax, inheritance tax, and wealth taxes. Each becomes more urgent to discuss politically if Labour moves further in that direction.’

Source - Business & Accountancy Daily

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