How squeezing the rich through tax may backfire
If Britain is to have a more European welfare state, it needs a more European tax system
If you are British and financially comfortable to reasonably well-off — say a typical Financial Times reader or, indeed, FT journalist — you certainly have pocketbook reasons to watch next week’s Budget carefully. Not because chancellor Rachel Reeves’s statement is likely to create another financial crisis, but because you are among the groups targeted for around £40bn in annual tax rises by the end of the decade.
Labour has been crystal clear that those with the broadest shoulders will bear the burden. Let me define this group as those with the top 10 per cent of income tax liabilities. There are just shy of 4mn of them and very simple maths tells you the annual additional bill would be a little over £10,000 a year each. To be in this group, you need a pre-tax income of £69,600. That’s quite something.
The calculation demonstrates the brutal maths of limiting tax increases to small groups. More importantly, it highlights how unusual the UK’s tax system is becoming in an international and historical context. This carries significant political and revenue risks for Reeves.
The UK’s overall tax burden is becoming increasingly European in its size, but the distribution of tax payments is not. Even before the previous government’s 4 percentage point cut in employee national insurance contributions, OECD figures show that UK income tax and social security burdens for employees on average incomes were comparatively very low. Not so for individuals with incomes two-thirds higher than the median, which are generally above the OECD average. It shows the UK has a very progressive direct tax system.
The Institute for Fiscal Studies calculates that while the direct tax take (income tax and employee national insurance) is at a half-century low for someone on median income, the overall tax burden is at an all-time high, with extra charges already loaded on high-income individuals and other taxes.
For income tax alone, in 2024-25 those with the top 10 per cent of incomes paid 60.2 per cent of total revenue, a figure estimated by HM Revenue & Customs to have risen from 53.5 per cent in 2010-11.
This concentration of the tax burden under the Conservatives should be surprising enough. But it is not — far from it — because those with the broadest shoulders have been running away with the nation’s loot over the past 14 years.
Separate pay-as-you-earn data also from HMRC shows that the gap in pre-tax earnings between those in the top decile and the median has been narrowing. The gap is about 6 per cent smaller than it was a decade ago and alternative official data shows a much greater compression in the earnings distribution.
Of course, we must not get too misty-eyed about the plight of those on high incomes. Their pay might not be keeping up with the rest of the population and they might be taxed a lot more than they were, but they are still richer and have better options than those on lower incomes.
Therein, however, lies one of many problems for Reeves. Having more options includes working a bit less if your marginal tax rate feels too high, retiring early or leaving the country. And it is these options that should make any chancellor think twice before raising their tax burden further. There might not be a lot more juice to squeeze.
After this Budget, unlike its European counterparts, the highly progressive UK tax system will be more vulnerable to changed behaviour — and with that comes a risk both to government revenues and to growth.
Moreover, tax is a collective activity. It is the price of participation in a civilised society and should not be seen as something that is for others to pay. In the end, if Britain is to have a more European welfare state, it needs a more European tax system. That means everyone, not just those with the broadest shoulders, needs to pay more.