Income Tax And The Earnings Distribution

19th July 2024

Income tax is the UK's single biggest tax stream, making up a quarter of total public sector receipts in 2024-25 (£302.7 billion or 10.9 per cent of GDP). Given the progressive nature of the income tax system (the more you earn, the higher the average rate of tax you pay) getting the distribution of income right is a key judgement for our income tax forecast. Around 60 per cent of income tax revenue comes from the top 10 per cent of earners, and 30 per cent from the top 1 per cent, so earnings changes at the top of the income scale can cause big shifts in the tax take.

Since the pandemic, income tax outturns have generally been higher than our forecasts, and higher than recent aggregate and average earnings data would have suggested.1 Since March 2023 we have therefore refined our forecast methods for PAYE income tax to make use of extensive analysis undertaken by HMRC on differential growth across the earnings distribution. In this article, we set out:

how we put the PAYE income tax forecast together in our biannual Economic and fiscal outlooks;

how new distributional analysis of earnings informs and improves our forecast; and

what our latest forecast assumes about earnings growth across the distribution.

Read the full article HERE

Download a Pdf HERE
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