Submitted by Bill Fernie
27th September 2026
How rising prices and frozen tax allowances can quietly increase the Treasury's income.
There is a curious feature of taxation which is easy to miss when we concentrate on the headline tax rates.
The Government does not necessarily have to increase a tax rate to collect more tax.
Sometimes it can simply allow prices and wages to rise.
That may sound like a technical distinction, but for households it can have a very real effect.
Take fuel. Petrol and diesel are subject to fuel duty, which is charged at a fixed amount per litre, and VAT at 20 per cent. Crucially, VAT is charged on the pump price, including fuel duty. So when the underlying price of fuel rises, the amount of VAT collected on every litre rises too. HMRC explicitly describes this effect in its road fuel review.
Suppose, simply for illustration, that the taxable price of a litre of diesel rises by £1. A 20 per cent VAT rate then produces another 20p of VAT on that litre.
The Government has not increased the VAT rate.
It has not announced a new tax.
But if millions of litres are sold at the higher price, the Treasury receives much more VAT.
This is particularly interesting in rural areas such as Caithness, where many people have little choice but to use a car for work, shopping, healthcare and other essential journeys. A higher fuel price is therefore not simply a matter of paying more at the pump. Part of that higher payment automatically becomes additional VAT revenue.
Heating oil provides another example, although the VAT rate is lower. Domestic heating oil is subject to 5 per cent VAT rather than the standard 20 per cent rate.
But 5 per cent of a higher price is still more money.
If heating oil were 80p a litre, the VAT element would be 4p. At £1.60 a litre, it would be 8p.
Again, the rate has not changed. The tax collected per litre has doubled because the price has doubled.
That matters in a part of Scotland where oil heating remains common. A household filling an oil tank during a period of high prices is not only paying more to its fuel supplier. It is also paying more VAT to the Treasury.
And fuel is only one part of the story.
The same principle operates with VAT across the economy. When the price of a VAT-rated product increases, the VAT charged on that product generally increases too.
HMRC's latest tax receipts figures provide a useful illustration. Between April and August 2026, HMRC collected £80.6 billion in VAT, £3.8 billion more than in the same period a year earlier. HMRC says VAT receipts in 2025–26 were £8.9 billion higher than the previous year and notes that the nominal VAT tax base had increased because of inflation and policy measures.
There is a warning attached to the latest figures because HMRC has changed the way some receipts are aligned to its accounting data, meaning year-on-year comparisons for 2026–27 should be treated with some caution. But the underlying mechanism is not in doubt.
Inflation can increase the cash value of the tax base.
Then there is income tax.
Here the mechanism is slightly different but the result can be remarkably similar.
The Government can leave income-tax rates unchanged while people gradually pay more income tax because their wages rise and tax allowances and thresholds do not keep pace.
The personal allowance is the clearest example. It has been frozen at £12,570 since April 2021 and, under current plans, will remain there until April 2031. The Institute for Fiscal Studies calculates that if the allowance had instead risen with inflation, it would now be about £16,070.
That is fiscal drag.
A worker can receive a pay rise which merely keeps pace with the rising cost of living, yet find that more of their income becomes taxable because the tax-free allowance has not increased.
The IFS estimates that the number of people paying income tax in 2026–27 is around 4.9 million higher than it would have been if the personal allowance had not been frozen since 2021. It projects that difference could reach 6.1 million by 2030–31.
Again, the tax rate itself has not necessarily changed.
But the amount collected can rise.
This creates an important distinction in political language.
There is a considerable difference between saying “we have not increased the tax rate” and saying “people will not pay more tax.”
The first can be entirely accurate while the second is not necessarily true.
It also explains why a Government can point to unchanged rates while the Treasury's receipts continue to grow.
HMRC's figures show that total tax and National Insurance receipts for April to August 2026 were £391.6 billion, £24.9 billion higher than in the same period of the previous year. Income Tax, Capital Gains Tax and National Insurance were £16.6 billion higher, while VAT was £3.8 billion higher.
There are many reasons behind changes in tax receipts, so these figures should not simply be interpreted as money generated by inflation alone. Employment, wages, profits, spending patterns and changes in tax policy all matter.
But the underlying point remains.
Tax rates do not tell us how much tax the Government collects.
A 20 per cent VAT rate applied to a £10 purchase produces £2 of VAT. Apply exactly the same rate to a £15 purchase and the VAT becomes £3.
Nobody has increased the rate.
The customer has simply paid more, and the Treasury has taken more.
The same principle applies to income tax when wages rise against frozen thresholds.
Perhaps this is why the language of taxation can sometimes be confusing for ordinary households.
People do not experience taxation as percentages in a Budget document. They experience it as the amount disappearing from their pay packet, the price displayed at the petrol pump or the size of the bill arriving through the door.
So when politicians say that tax rates have not increased, that is an important fact.
But it is only part of the story.
The tax rate can stay exactly the same while the tax take rises.
And sometimes the most effective way of increasing the amount collected is not to announce a tax rise at all.
“Taxes can rise without tax rates rising. The question is what government does with the extra money.”