A forgotten 50th anniversary on income tax
In 1975, the Chancellor’s Budget dared to go where no successor has dared since.
In 1975, the Chancellor’s Budget dared to go where no successor has dared since.
1975 was a memorable year in UK politics. In February 1975, Margaret Thatcher won the Conservative leadership election from Ted Heath, who almost a year previously had led his party to defeat. Four months later, in June 1975, the UK voted 67% in favour of remaining part of the EEC (now EU) in its first referendum.
Neatly positioned between those two events, in April 1975, the Labour Chancellor, Denis Healey, increased basic rate tax by 2% to 35%. Healey and his party went on to lose the 1979 election to Mrs Thatcher, leaving Labour in opposition for the next 18 years. This might explain why successive Chancellors have only ever cut the basic rate of tax. It also accounts for why the major parties tend to make rigid income tax promises in manifestos, which economists consider as risky constraints for a five-year term.
Income tax is by far the largest source of revenue for the government. The Office for Budget Responsibility projects that in 2025/26 it will deliver 30% of all tax revenue. This is more than half as much again as the next largest money raiser, national insurance contributions (NICs). Adding 1p to the basic rate of tax now would feed £7.9 billion into the Exchequer’s coffers in 2026/27. It is also easy from an administrative viewpoint, as roughly £6 out of every £7 of income tax is collected by pay as you earn (PAYE).
But don’t worry, an increase in basic rate of tax is extremely unlikely to happen during the remainder of this Parliament. Rachel Reeves has already followed the trail blazed by her predecessors and resorted to an increase in NICs, which are arguably another form of income tax, but applied only to earnings. Whereas the basic rate of tax has fallen significantly since 1975, NICs have stealthily gone in the opposite direction, both in terms of rates and the income to which they are applied.
The result is that, when you think of how your earnings are taxed, the headline-grabbing basic rate of tax has become an increasingly smaller part of the whole story.
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