The coronavirus pandemic has had a negative impact on many people’s finances. Some have lost jobs while others have seen their income take a hit. However, new data shows that, in addition to harming people’s finances, the pandemic has also drained the government’s coffers, with national tax revenue falling significantly.
Here’s everything you need to know.
The impact of the pandemic on tax revenue
In the 2019/2020 financial year, the total value of HMRC tax receipts for the UK amounted to £634.64 billion, according to Statista.
But with the economy closed for business for much of last year and the government introducing several tax breaks and reliefs to cushion people and businesses from total annihilation, government coffers have taken a massive hit.
The stats suggest that in the 2020/21 financial year, tax receipts dropped 7.8% – or £49.1 billion – to £584.3 billion.
This, according to Sarah Coles, personal finance analyst at online trading platform Hargreaves Lansdown, is the first fall in HMRC collections since the financial crisis of 2008-2010.
What has caused the drop in tax revenue?
The drop is attributable to the economic impact of the pandemic and the accompanying government response.
For example, income tax is the single greatest source of government revenue. But because of massive job losses, income reduction, and furlough, receipts from income tax have fallen.
Reduced spending, once again due to the financial impact of the pandemic, has resulted in income from VAT falling from £129.9 billion to £101.1 billion. Travel restrictions have also reduced the amount of fuel duty and air passenger duty the government has received.
Furthermore, tax breaks such as the stamp duty holiday, which was introduced last year to turbocharge the faltering housing market, have also resulted in less overall revenue for the government.
Has tax revenue dropped in all areas?
No. There are a few taxes that have defied the trend.
These include alcohol duty and inheritance tax. Despite pubs, bars and restaurants being closed for much of last year, alcohol duty has gone up from £11.8 billion to £12.1 billion.
A higher number of deaths has led to inheritance tax rising to £5.3 billion. This is close to its peak of £5.4 billion in 2018/19.
What does the future hold?
According to Coles, Brits are set to feel the impact of reduced government coffers over time.
The Treasury is reeling from lower incoming revenue at a time of record spending. In 2020, it is estimated that the government spent more than £271 billion on coronavirus-related issues.
Once the worst economic effects of the crisis have passed, the government will undoubtedly be eager to replenish its coffers. This implies that British taxpayers might face higher taxes in the near future.
How can I prepare financially for the future?
As mentioned by Coles, it pays to stay ahead of whatever tax pain the government may have in store. That could mean:
- Taking full advantage of your £20,000 a year ISA allowance – the benefit of saving or investing via an ISA is that you don’t have to pay tax on your investment gains. With a stocks and shares ISA, for example, that means zero capital gains tax on profits from rises in share prices, no tax on any income from dividends and no tax on interest earned from bonds.
- Making maximum contributions to your pension.
- Reviewing your estate plan to reduce overpaying on inheritance tax.
Tax rules are always changing. However, given the year we’ve had, in which the government’s revenue has been significantly reduced, the likelihood of tax increases is higher than ever. It’s therefore important to make sure you are well prepared for whatever the government might be planning.
The good news is that there is a wealth of free resources to help you. These include the support of organisations such as Citizens Advice and the Pension Advisory Service. If you need assistance or guidance in planning for your financial future, don’t hesitate to contact them.
Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.
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