For the third consecutive year, the government is sending 30 million households a clear and simple summary of how much income tax and national insurance they paid in the last financial year. The summary will provide an illustration of how your payments of income taxes and national insurance contributions were used by the government in its spending.
Government spending can be broken down and understood in different ways. This guide outlines how the public spending breakdown was calculated and shown in your tax summary and provides some general context on tax and spending.
You can find out more about tax and spending from the statistics published by ONS at the links below:
The tax statements have been sent to everyone who paid income tax and national insurance in the 2015 financial year. According to the ONS statistics published in November, in 2015/16 the government received total of £170 billion in income taxes (PAYE and Self-Assessment) and £114 billion in national insurance contributions. These taxes made up over 40% of the £680 billion total current receipts in 2015/16. Spending, known as total managed expenditure, in 2015/16 was £756 billion. The difference between these two numbers is public sector net borrowing (excluding public sector banks) – commonly known as the deficit. This was £76 billion in 2014/15.
Indirect taxes such as VAT have not been included in the summary, because HMRC do not hold data on individual consumer spending – which would be required to show the total amount of VAT that an individual has paid in a year.
2. How public spending was calculated in your annual tax summary
The illustrative breakdown of how your payments of income tax and national insurance contributions is spent in your Tax Summary is largely based on Official Statistics published by the government in the Public Expenditure Statistical Analyses (PESA). PESA is the annual publication of information on public, or government, spending. PESA for 2015/16 can be found at the link below:
PESA provides a range of information about public spending, largely based around two frameworks: ‘budgeting’, which provides information about central government departmental budgets, which are the aggregates the government uses to plan and control expenditure; and ‘expenditure on services’, which is based on National Accounts definitions and covers spending by the whole of the public sector. The tax summaries are based on the ‘expenditure on services’ framework, as it has a wider coverage and is more stable over time. The total ‘expenditure on services’ figure is normally lower than ‘Total managed expenditure’ (mentioned in the first section) because of the difficulty of attributing some types of spending to an appropriate function. One of the main differences is that it doesn’t include depreciation or reverse certain VAT refunds. More detail on spending frameworks can be seen in Annex E of the above PESA link.
Within ‘expenditure on services’, there are different ways to show spending by the public sector. For the tax summaries, the government chose to use a spending analysis based on ‘function’. An analysis based on function shows how the government spends money on a particular cross-cutting purpose or area, and gives a truer picture of what is spent on a given area than is provided by departmental expenditure. In PESA, the different functional areas of spend are defined using the United Nations ‘Classification of the Functions of Government’ (UNCOFOG). This shows public spending against ten functions, which is then further divided into more detailed sub-functions. Further information about UNCOFOG can be found online here:
3. How public spending is described in your annual tax summary
Public spending in the annual tax summary is based on Table 5.2 in PESA, which, as described above, provides a functional analysis of public spending by the UK government in the financial year 2015/16. You can find the full table at the following link: PESA Table 5.2
Where possible, the tax summary uses the same headings as PESA does, such as for defence or health. However, initial testing with taxpayers indicated that the summaries would be more useful if the data were presented using accessible and easily-understood labels. Some PESA categories are broadly defined and contain significant areas of expenditure that are often considered as discrete from one another, and so it has been necessary, in some instances, to break down the data into segments that are more easily accessible for taxpayers.
For instance, state pensions are a significant area of ‘social protection’, so they have been shown as a separate category. As the data for state pensions is not published separately in PESA for 2015/16, the state pension number is taken from the Office for Budgetary Responsibility’s Economic and Fiscal Outlook, March 2016. The remainder of ‘social protection’ has also been renamed ‘welfare’, in line with the consideration that terms should be accessible and easily understood by taxpayers. The Social protection category follows UN Statistics guidance (as outlined above) it therefore includes spending on items such as unemployment benefits, tax credits, public sector pensions and various benefits/support covering categories such ‘old age’, ‘sickness and disability’, ‘Housing’, ‘Family/Children’ and ‘personal social services’.
Further changes and the associated amounts published in PESA can be seen in the table below. These were again made in line with the consideration that terms should be accessible and easily understood by taxpayers.
|Tax summary description||Description of PESA source (See PESA Table 5.2)||Public Sector Expenditure (£bn)||%|
|Welfare||‘Social Protection’ excluding state pensions||174.9||25.0|
|State Pensions||Within ‘Social Protection’ 1||89.3||12.8|
|National Debt Interest||Within General Public Services, but shown in more detail in table 5.2||36.7||5.3|
|Public Order & Safety||Public Order & Safety||30.2||4.3|
|Transport||Economic Affairs, without Business and Industry but shown in more detail in table 5.2||28.1||4.0|
|Business & Industry||Economic Affairs, without Transport||17.1||2.4|
|Government Administration||Captured under General Public Services, but shown in more detail in table 5.2||13.8||2.0|
|Culture (e.g. sports, libraries, museums)||Recreation, Culture & Religion||11.4||1.6|
|Housing and utilities (eg street lights)||Housing & Community Amenities||10.0||1.4|
|Overseas Aid||Captured under General Public Services, but shown in more detail in table 5.2||8.2||1.2|
|UK Contributions to EU budget||EU Transactions||7.7||1.1|
The government has made very few changes to the presentation of tax summaries from last year. This is to enable comparison across years. There have however been some underlying changes in accounting treatment and methodology which have affected the size of the lines for Transport, Education, and UK Contributions to EU budget, as follows:
- the increase seen in Transport spending in 2015-16 is due to Network Rail functional spending only being included within ‘Total Expenditure on services’ and therefore the Tax Summaries from that year onwards
- for the 2016 Tax Summaries the ‘grant-equivalent element of student loans’ is no longer part of the ‘total expenditure on services’ framework and has therefore been removed from the Education function. Therefore figures are not directly comparable between 2014-15 and 2015-16
- VAT-based contributions are now included in EU transactions thus bringing these totals in line with ESA10. Figures are therefore not directly comparable between 2014-15 and 2015-16
- State Pension figures quoted here are from the OBR Economic and fiscal outlook – March 2016