Fact check: Direct tax rates have fallen for working households

When challenged about the Conservatives’ tax pledges during a BBC Panorama interview on June 10, Rishi Sunak said: “The average tax rate faced by a typical person in work is the lowest it has been in over half a century.”

The Prime Minister added, when pushed on the impact of frozen tax thresholds under his premiership, that “an average worker is facing the lowest tax rate on their earnings that they have seen in this country for over 50 years”, and specified he was talking about “the effective tax rate”.

Evaluation

Because significant changes in types and rates of taxation have taken place over the last 50 years, the Prime Minister’s claim is difficult to independently corroborate over that period for individual workers.

However, this appears to be correct according to Treasury analysis (partly based on data from the Office of National Statistics) of the spring budget in March in the specific circumstance of a “full-time median earner with no children and no interaction with the benefits system”. It also applies to other household demographics, when referring to direct taxation, but not when changes to benefits are taken into account.

The facts

The effective tax rate is the average percentage of income an individual pays in taxes which can be worked out by dividing their total tax by their taxable income.

The tax-free threshold (the amount of money a worker can earn before paying tax) has been frozen at the 2021/22 tax year level of £12,570. Workers then pay 20% income tax on all their earnings about that, up to £50,270 – a figure which has also been frozen at the 2021/22 level, with higher rates for any further wages.

The median salary for full-time employees was £34,963 in April 2023, according to the most recent Annual Survey for Hours and Earnings from the ONS, so a median earner would not pay the higher rate of 40% income tax.

In April, the Government cut the national insurance rate from 10% to 8% for employees, having also dropped it from 12% to 10% in January.

Income tax and national insurance contributions make up the primary direct taxes for workers. Research by the independent Institute for Fiscal Studies  (IFS) shows that, since 2010, these have fallen for all in-work households as a percentage of their income.

But once indirect taxes, such as VAT, and the impact of changes to benefits such as the two-child cap, are taken into account, analysis of the tax impact since 2010 is split: working households without children are better off, while those with children are losing out.

The wider picture of taxation in the UK also includes the tax burden, which is the percentage of overall GDP gathered as total tax revenue. Gross Domestic Product (GDP) is a measure of the size and growth of the economy.

According the Office for Budget Responsibility (OBR), in 2021, the tax burden was higher than at any point since 1965. Meanwhile, the IFS reports the tax burden is the highest since 1948.

Despite this, IFS analysis shows that for most working households, the direct rate of income tax is lower since 2010: increasing disposable income by 1.3% for higher-earning households with children, and by 3.8% for lower-earning families without children.

While direct and indirect taxes are lower for all working households included in the IFS analysis, the figures do show that the impact of cuts to benefits mean only some working households without children are better off overall: a single worker would be £585 better off annually by 2024 prices, and a two-earner couple by £1,731.

However, families with children are all worse off overall, and single-earner families are hardest hit, more than £2,000 down on 2010.

Links

BBC iPlayer – The Panorama Interviews With Nick Robinson: Rishi Sunak, Conservative Party

Gov.uk – Rates and allowances for income tax (archived)

HM Treasury – Spring budget 2024: Personal tax factsheet (archived)

HM Treasury – Autumn statement 2023 (archived)

House of Commons Library – Direct taxes: rates and allowances for 2024/25 (archived)

The Institute for Fiscal Studies – The Government’s record on tax 2010–24 (archived)

The Institute for Fiscal Studies – What has been the distributional impact of tax and benefit reforms since 2010? (archived)

OBR – The UK’s tax burden in historical and international context (archived)

ONS – Employee earnings in the UK: 2023 (archived)