Published alongside the Chancellor’s Spring Forecast in early March, the OBR highlighted some key projections for the UK economy:
“The tax-to-GDP ratio is forecast to increase to a post-war high of 38.5 per cent of GDP in 2030/31. And many marginal tax rates, of relevance to incentives to work, save and invest, are much higher. A higher level of the tax take increases the risk that incentives within the tax system distort or constrain economic activity by more than expected.”
What does this mean in practice?
As is often the case with OBR commentary, the message becomes clearer when broken down:
- Tax-to-GDP ratio
This measures the overall tax burden on the economy. Based on current forecasts, the government will take 38.5p of every £1 generated by the UK economy by 2030/31, the highest level in modern times - Marginal tax rate
This is the effective rate of tax applied to each additional £1 of income or capital. In some cases, this can be significantly higher than headline tax rates and, in certain situations, can exceed 100% - Impact on behaviour
High marginal tax rates can influence decision-making. For example, if additional income is heavily taxed, you may be less inclined to take on extra work, accept a promotion or increase your hours
Why this matters
These figures highlight a broader point. Tax is not just about what you pay, it can also shape how you work, save and invest.
Understanding where these disincentives exist can help you make more informed decisions and plan more effectively for the future.
As part of the SMH Group, you will also benefit from access to a wider range of services to support you through every stage of your financial journey. We are here to give you the confidence to grow and shape your future.
A good example of what the OBR is concerned about can be found at the £100,000 income level. Crossing that threshold means:
- A gradual loss of the personal allowance, equating to a marginal tax rate on earnings of 60% (67.5% in Scotland) up to £125,140 of total income. Add in national insurance (2%) and, for many graduates, student loan repayments (9%), and out of every marginal £1 over £100,000 there could be only 29p (21.5p in Scotland) left to spend.
- Entitlement to tax-free childcare, worth up to £2,000 per child is lost. So too is entitlement (other than in Scotland) worth up to 30 hours of free childcare.
The OBR plans to “conduct further analysis of UK marginal tax rates” this year, but given revenue pressures, the chances of reform look slim. Better look to your own tax planning.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
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