MoneyWeek: Tax Freedom Day comes early – but it's not good news

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altWritten by David Stevenson

Happy Tax Freedom Day!

Today's the day when the average Briton has earned enough to pay his annual tax bill. In other words, today you stop working for the Government, and start working for yourself. And the – apparent - good news is that this year, we're enjoying the earliest Tax Freedom Day since 1973.

But before you start popping the champagne corks, there's a very nasty sting - or two – in the tale... The bad news on Tax Freedom Day

This year, it's 'only' taken British taxpayers the first 135 days of the year to pay off their debt to the taxman, according to the Adam Smith Institute, the independent think-tank which crunches the numbers.

Of course, it doesn't work out that way in practice. Employees on PAYE pay a tax slice every month, while the self-employed get saddled with a once-a-year bill. But it's still a useful guide to see how large a slice of our total incomes is being surgically removed by the Revenue. And this year, Tax Freedom Day has actually come at its earliest date since 1973.

So are celebrations in order? Sadly, no. TF Day is worked out on what we actually pay in tax. As the economy tanks, people pay less tax because incomes shrink and unemployment rises. So that's the reason it's early this year – not because the Government has slashed tax rates.

In fact, if you factor in government borrowing (which we'll have to pay for eventually), then TF Day wouldn't arrive until 25th June – which would be the latest point in the year since 1984.

And the real bad news is that this gap between TF Day based on tax take and TF Day based on total government spending is rapidly widening as the government's annual shortfall gets larger and larger. The official gap this year is forecast to be £175bn. In reality, it's almost certain to be a lot bigger.

Published on MoneyWeek here