Here's how the government spends our taxes

Ahead of the general election, the Tories and Labour have repeatedly clashed over each other’s tax plans. But how is each pound spent?

Rishi Sunak's Tories and Sir Keir Starmer's Labour have repeatedly clashed over tax and spending plans. (Getty Images)
Rishi Sunak's Tories and Sir Keir Starmer's Labour have repeatedly clashed over tax and spending plans. (Getty Images)

If 2019 was the Brexit election, 2024 is the tax election.

The Tories and Labour have repeatedly clashed over each other’s tax plans, with chancellor Jeremy Hunt claiming on Sunday that Sir Keir Starmer would turn the UK into a “taxtopia”.

Labour has hit back by accusing the Tories - way behind in the polls - of being “desperate” and having “massive holes” in their own plans.

But the Tory focus on tax continued after Starmer ruled out imposing capital gains tax on the sale of family homes. The Conservatives are now demanding he rules out a series of other potential tax measures they claim would be needed to fill a “£38.5bn black hole” in Labour’s plans.

But amid all the sniping, how does a government actually spend each pound it takes from us in tax? And what have experts said about the Tory and Labour tax pledges set out in their manifestos this week? Here, Yahoo News UK explains.

On Tuesday, Rishi Sunak unveiled a manifesto containing a £17.2bn package of tax cuts, including a further 2p cut to national insurance for employees. This will build on similar successive 2p cuts at the autumn statement and spring budget.

For the self-employed, the main rate of national insurance would be abolished by the end of the next parliament.

The manifesto also promises no increases to income tax, national insurance or VAT. And the Tories have pledged to scrap capital gains tax for landlords who sell properties to their tenants.

NORTHAMPTON, UNITED KINGDOM - JUNE 11: British Prime Minister and Conservative Party leader Rishi Sunak launches the Conservative Party general election manifesto at the Silverstone race track in Northamptonshire, United Kingdom on June 11, 2024. With polls just weeks away, Britain's embattled Conservative Party on Tuesday launched its election manifesto, promising significant tax cuts and a focus on economic stability. Prime Minister Rishi Sunak outlined the party's key pledges, which include a 2 percentage point cut in employee National Insurance by April 2027 and the abolition of the main rate of self-employed National Insurance by the end of the parliamentary term. In addition to these tax cuts, Sunak announced a series of measures aimed at supporting first-time homebuyers and tenants. (Photo by Rasid Necati Aslim/Anadolu via Getty Images)
Rishi Sunak launches the Conservative election manifesto at the Silverstone race track on Tuesday. (Getty Images)

Meanwhile, economic stability was Labour’s pitch to voters in its manifesto released on Thursday, with a pledge to cap corporation tax at its current rate of 25% to give businesses long-term certainty.

Along with this, Labour has ruled out raising the rates of income tax, national insurance and VAT. It has also committed to charging VAT on private school fees, abolishing the non-dom tax status and closing “loopholes” in the windfall tax on oil and gas companies.

In total, Labour plans to raise more than £7bn in revenue from tax, its costings document said.

TOPSHOT - Britain's main opposition Labour Party leader Keir Starmer delivers a speech on stage during the launching of Labour Party election manifesto, in Manchester, on June 13, 2024 in the build-up to the UK general election on July 4. (Photo by Oli SCARFF / AFP) (Photo by OLI SCARFF/AFP via Getty Images)
Labour leader Sir Keir Starmer launches the party's election manifesto in Manchester on Thursday. (Getty Images)

Leading think tank director Paul Johnson, of the Institute for Fiscal Studies, said he was sceptical about the Tory manifesto’s costings.

“The Conservatives have promised some £17bn per year of tax cuts and a big hike in defence spending,” he said. “That is supposedly funded by reducing the projected welfare bill by £12bn; cracking down on tax avoidance and evasion; and saving billions from cutting civil service numbers, reducing spending on management consultants and ‘quango efficiencies’.

“Those are definite giveaways paid for by uncertain, unspecific and apparently victimless savings. Forgive a degree of scepticism.”

On the Labour manifesto, Johnson said the tax outlook was equally uncertain: “Yes, [economic] growth could surprise on the upside - and if it does, then the fiscal arithmetic would be easier. But if it doesn’t - and it hasn’t tended to in recent years - then either we will get those cuts, or the fiscal targets will be fudged, or taxes will rise.”

First of all, it should be pointed out that the following breakdowns are based on government figures last updated in January: prior to the most recent budget in March. However, they still give a good indication of where taxpayers' money goes.

This first chart shows how much is spent comparatively on different sectors.

So, almost half of our taxes - 40% - is spent on health (20%) and welfare (20%) alone. When we consider some of the numbers and factors behind these key sectors, we can gain an understanding of why so much is spent on them.

For example, under health spending, the NHS has a gigantic workforce of around 1.7 million people: making it one of the biggest employers in the world - and the biggest in Europe. Around two-thirds of its budget goes on headcount.

Funding of the NHS is broadly split into two areas: day-to-day running costs, which accounts for the vast majority of spending, and infrastructure. The health service sees around 1.3 million patients every day.

And it's not going to get any smaller - acccording to the NHS Long Term Workforce Plan, the projected demand for staff by 2036/37 will be in the region of 2.4 million people.

Welfare, meanwhile, is defined by the government as "social protection". This includes spending on numerous areas such as unemployment benefits, tax credits, public sector pensions... as well as benefits or support covering categories such as old age, sickness and disability, housing, children and families.

Universal credit is expected to account for 27% of total welfare spending in 2023-24.

A further 40% of our taxes is spent on national debt interest (12%), state pensions (10%), education (10%) and business and industry (8%).

This second chart, meanwhile, shows the total amounts spent on the same areas as above.

According to an IFS report this week, tax revenue as a share of national income was 36% and rising earlier this month, “the highest tax burden since 1948”.

"The parliament that started in 2019 saw the biggest rise in the tax take of any parliament in modern history," it said.

Taxes as a share of GDP. (OBR)
Taxes as a share of GDP. (OBR)

The Office for Budget Responsibility, meanwhile, has previously forecasted (see chart, above) tax will represent 37.1% of GDP by 2028–29. This would be just below the all-time high of 37.2% in 1948.

However, the IFS also pointed out the tax burden "is not high compared with most western European countries".

In 2021, the most recent year for internationally comparable data, UK tax revenue was 33.5% of GDP, compared to an average 39.9% of GDP among the EU14 countries - those in the EU before 2004 - including France and Germany.

Your guide to voting

The manifestos

The leaders