Cash Decline Boosts UK Tax Revenue by £12bn

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The shift away from cash transactions has resulted in an additional £12 billion in tax revenue for the UK, benefiting Chancellor Jeremy Hunt’s coffers as card and digital payments make tax evasion more challenging.
Richard Hughes, chairman of the Office for Budget Responsibility (OBR), noted that the decline in cash usage has particularly bolstered Value Added Tax (VAT) receipts, reducing the VAT gap significantly. The VAT “tax gap” has diminished from 0.8% of GDP in 2005-06 to 0.3% in 2021-22, resulting in a £12.1 billion increase in tax income.
According to the British Retail Consortium (BRC), cash is now used in less than one-fifth of transactions, down from over half a decade ago. This trend is particularly notable for smaller purchases, where notes and coins were traditionally used.
Card payments and digital transfers, with their traceability, make it easier for authorities to enforce the 20% transaction tax compared to cash-in-hand transactions, thus contributing to increased tax revenue.
Chancellor Hunt has pledged to provide HM Revenue and Customs (HMRC) with additional resources to enhance tax collection efforts, anticipating a revenue increase of over £4.5 billion across the forecast period.
Amid these shifts, the Bank of England’s quantitative easing program has incurred significant costs. The Bank, which purchased nearly £900 billion of UK debt during the pandemic and financial crisis to support the economy, is now facing losses as interest rates rise and gilt yields increase.
The OBR warns that the lifetime cost of quantitative tightening could vary significantly depending on future interest rate movements. While lower interest rates could mitigate costs, higher rates could substantially increase the cost of debt reduction.
Despite these financial complexities, the OBR emphasizes the crucial role of quantitative easing in supporting the economy, asset prices, and financial markets during periods of stress over the past 15 years.