How does the UK compare to G7 nations for cutting income tax?

By: Jonathan Eida, researcher

Taxpayers in the UK have been struggling through a cost-of-living crisis. The tax burden is currently at a 70 year high. Alongside this record tax burden, the public have faced higher levels of inflation and increasing interest rates, impacting mortgage payers.

The impact is particularly being felt by those paying the basic rate of income tax. In 2021, the government froze income tax thresholds which resulted in more people beginning to pay tax, or paying tax at a higher rate, as their incomes rise and nominal tax thresholds stay the same. In total an additional 2.5 million people are forecast to be paying income tax in 2023-24 than in 2021-22. This measure is expected to raise £40 billion a year by the middle of the next parliament, while taxpayers continue to face considerable financial pressures and households struggle to make their budgets add up.

This is a far cry from promises by the prime minister to cut the basic rate of income tax by 4p if he won power in the 2022 leadership contest (the first one). That promise was a reflection on how long it has been since the last time the basic rate was cut. The UK last cut the basic rate of income tax in March 2008 when Gordon Brown was prime minister, where it was reduced from 22 per cent to 20 per cent. That’s over 15 years ago. 

And it means the UK is lagging behind many similar nations in giving its basic rate taxpayers relief. Amongst other G7 nations the UK remains to be one of the very few that haven’t cut their equivalent basic rates of income tax or cut a measure that is associated with basic rate income taxpayers in recent years.

Italy, France and the United States have all cut their basic rate equivalents since the UK last cut its basic rate in 2008. These nations cut their basic rates in 2024, 2019 and 2018, respectively. Germany too has effectively implemented a basic rate income tax cut by eliminating a surcharge on low and middle income tax paying citizens in 2021. 

Canada cut their basic rate in 2008, the same year as the UK. Only Japan cut their basic rate longer ago than the UK 

With this being said, Japan reduced income tax by the second largest amount in the G7 with their equivalent basic rate being lowered from 10 per cent to 5 per cent. Only Germany, who removed a 5.5 per cent surcharge for lower and middle rate income tax payers, have had a larger effective basic rate tax cut. 

In comparison, the Gordon Brown tax cuts in 2008 only saw a 2 per cent reduction for basic rate payers, who are still paying 20 per cent of any income over £12,570. This is significantly below Japan and Germany’s reductions. The basic rate equivalent reduction in the United States and France both saw a 3 per cent decrease.

As a result, the UK has one of the highest basic rates of income tax out of any of the G7. Japan has the lowest basic rate of income tax in the G7 at 5 per cent. Only Italy has a higher basic rate at twenty three per cent. 

Table 1: year of last cut to basic rate income tax equivalent among G7 nations

With the UK lagging behind its G7 counterparts, it’s surely time for a change in direction. With the Chancellor’s budget being unveiled on 6th March, a cut to the basic rate of income tax should be announced, bringing the UK more in line with its G7 peers. Taxpayers are struggling and are in need of relief. A cut to the basic rate of income tax would be a step towards alleviating the pressure felt by citizens across the country.  

With thanks to the Tax Foundation for their assistance.