Government backfires
The UK government's imposition of VAT on schools will raise less money than they calculated, and might well cost them money.
Private schools now charge VAT at 20% on fees, and the government collects that revenue. On paper, this looks like a straightforward tax windfall. But several offsetting effects erode or potentially reverse the gain.
Families who can no longer afford fees pushed up by 20% are withdrawing their children and placing them in state schools, which the government must fund. Estimates run as high as one in ten leaving private education. Each additional state school pupil costs roughly £7,000-£8,000 per year. If enough pupils switch, this spending can outweigh VAT receipts.
Private schools, now VAT-registered, can reclaim VAT on their own purchases such as building work, supplies, etc., something they couldn't do before. This reduces the net VAT take.
Some private schools are charities and enjoyed business rate relief. Disruption to their finances could affect other tax dynamics. And if schools absorb some of the VAT rather than passing it all on, to retain pupils, the VAT collected is lower than expected.
Independent analysts, including the IFS, are more skeptical, suggesting the true net figure could be substantially lower, and that the pupil migration assumptions may have been optimistic. If pupil migration to state schools is higher than forecast, which early indications suggested it might be, the policy could come close to breaking even or even cost money instead.
Several other of the UK government's tax increases carry meaningful risks of negative economic consequences.
Employer National Insurance Contributions are arguably the most economically damaging of the measures. The employer NICs rate rose from 13.8% to 15%, and the threshold at which it kicks in was cut from £9,100 to £5,000 a year, coming into effect on 6 April 2025.
The early evidence is troubling: between October 2024 and April 2025, employee jobs fell by 167,000 in HMRC's real-time data, suggesting the OBR may have underestimated the adverse effect on jobs. Job losses have been concentrated in hotels, pubs and restaurants, sectors employing relatively large numbers of lower-paid or part-time workers, and heavily skewed toward younger workers. Businesses have responded in predictable ways: 54% of businesses surveyed anticipated raising prices to offset the additional costs, and some employers are looking at redundancies to accommodate the higher wage bill.
The Fiscal Drag of frozen Income Tax thresholds is a stealth tax increase rather than a headline one. Freezing income tax thresholds increases the tax burden on labour, reducing the after-tax return on work, discouraging additional hours and workforce participation, and risks shrinking the labour supply while slowing economic growth. By keeping thresholds frozen until 2028, more people are dragged into higher bands each year as wages rise.
The Capital Gains Tax rise is also damaging. There were increases in both the lower CGT rate (from 10% to 18%) and the higher rate (from 20% to 24%), taking immediate effect from October 2024. The concern here is behavioural. Wealth managers reported a sell-off trend before the Budget, indicating that raising capital gains taxation risks a flight of capital. A short-term sell-off would result in a temporary tax revenue boost, but at the expense of tax revenues in the long run. There is also a broader worry that higher CGT discourages risk-taking and entrepreneurial investment.
The extension of Inheritance Tax to previously exempt farm and business assets has generated significant controversy. Family farmers in particular argue it will force the break-up or sale of farms that have been in families for generations to pay tax bills, even if the underlying business is not cash-rich. The government disputes this, arguing most farms fall below the relevant thresholds, but the farming community remains deeply hostile to the change.
The reduction to the Writing Down Allowance is an unnecessarily harmful way to raise £1.5 billion in additional revenue, since allowing businesses to recover the full cost of their investment is one of the most cost-effective ways to encourage investment and economic growth.
Combined with earlier hikes, the total tax burden has climbed dramatically, pushing Britain towards the highest tax take as a share of GDP in the post-war era. The government's argument is that the spending funded by these taxes, particularly on NHS, education and infrastructure, will support long-term growth. This is unlikely, but even if this were true, the short-term drag from higher employment costs in particular appears to be real and much larger than initially projected.
Madsen Pirie