The Commons: The UK’s Tax System – A Patchwork In Need Of Reform
The UK government's approach to collecting tax revenue feels chaotic, riddled with loopholes that let certain people and businesses dodge paying their fair share. Nobody enjoys paying taxes, and any changes to taxation are inherently controversial. As such, most British governments have avoided tackling the convoluted and increasingly unfair tax system, opting instead to tinker around the edges without making substantive improvements.
There are many taxes the UK levies on individuals and companies, but the bulk of the Treasury’s revenue comes from three main taxes: income tax, national insurance contributions (NICs), and VAT. These three alone in the 2023-24 tax year made up 63% of government revenue, but the strangest tax by far is income tax. On the surface it seems relatively simple; Brits can earn a ‘personal allowance’, which is up to £12,570, tax-free, anything between £12,570 and £50,270 they pay 20% tax on, then from £50,271 to £125,140 they are taxed 40%, and anything above £125,140 is taxed at 45%. However, if a Brit has a child receives child benefit, when they earn over the threshold of £60,000 they must pay some of the benefit back as a tax scaling depending on how much they earn. Furthermore, anyone earning over £100,000 start to get the tax-free personal allowance taken away from them, with it decreasing by £1 for every £2 that their income is over £100,000. That is a lot of numbers, but what it means is that for every extra pound earnt, the amount of tax paid on that extra pound varies in a way that is not progressive or fair for all taxpayers.
National insurance is the British equivalent of social security contributions (SSC) and any employee who earns over £242 a week (£12,584 a year) are affected. Brits must pay 8% of their salary for national insurance in order to have access to certain benefits they may need in the future such as jobseeker’s allowance or the state pension. The rate then drops to 2% for anything over £967 a week (£50,284 a year). This means that once they reach this higher threshold, the tax becomes regressive, with higher paid workers contributing a lower overall percentage of their salary compared to those under the threshold. Retired people, who are the richest age group in UK society, do not have to pay NI, contributing to increasing generational inequality as working age people bear the brunt of this tax. However, when looking at comparable western countries like France and Germany, Brits pay less in SSC overall. In 2019, National Insurance contributions raised 6.6% of GDP, compared with SSCs raising 12.0% on average for the EU14.
Income tax and social security contributions paid under different countries’ tax systems, 2016-17
The new UK government modified some taxes in the 2024 Autumn budget, with the headline figure of £40bn in overall tax rises accredited to the changes. The government plan to remove the non-domiciled, ‘non-dom’, tax status, which they see as a loophole that wealthy people exploit to avoid paying income tax. The government are also altering the employer side of NIC payments, increasing the rate from 13.8% to 15% so businesses will have pay more in tax per worker as well as decreasing the limit at which employers become liable to pay NICs on employee’s earnings, being reduced from £9,100 to £5,000 a year. However, they have shielded some smaller businesses by increasing the employment allowance, which is effectively a NIC tax break for eligible businesses, from £5,000 to £10,500 per year.
In December 2024, the UK government introduced a new levy known as the "Grocery Tax" as part of its Extended Producer Responsibility (EPR) scheme, aimed at reducing packaging waste and supporting net zero goals. Under this policy, retailers and manufacturers are required to cover the full costs of managing the packaging materials they produce, with higher charges for plastics than for materials like paper or cardboard. While the government argues this incentivizes more sustainable practices, it is estimated that this measure could add up to £1.4 billion to household shopping bills annually, equating to an extra £28 to £56 per household per year. Some industry groups, such as the British Retail Consortium, argue the actual figure could be much higher, potentially adding as much as £70 to the average household's yearly grocery bill. Critics warn that, much like VAT, the Grocery Tax risks disproportionately affecting low-income households, especially at a time when many are already struggling with rising living costs.
These new tax changes are but examples of the tinker around the edges approach to taxation in the UK, they do not address the broader inefficiencies of the tax system. The government continues to implement specific small measures, which may unintentionally exacerbate financial inequality. Looking abroad, there are examples of tax systems that are simpler, fairer, and more effective, which could provide a blueprint for much-needed reform in the UK.
Take Denmark, for example. The Danish tax system is progressive and transparent, with income tax rates that range from 8% for lower earners to 55.9% for the highest earners. In return, citizens benefit from universally accessible services such as healthcare and education. Importantly, Denmark avoids the kind of convoluted thresholds and tax relief phase-outs that complicate the UK system. Similarly, New Zealand takes a streamlined approach by funding social services through general taxation instead of separate levies like national insurance. This not only simplifies the system but also avoids the regressive nature of national insurance in the UK, which places a heavier burden on younger, working-age individuals while retirees, the wealthiest age group, are exempt. Additionally, New Zealand’s Goods and Services Tax (GST) is applied uniformly, avoiding the complexity and perceived unfairness of the UK’s NI system.
Reforming the UK tax system to emulate elements of these models would require substantial political will and a willingness to tackle entrenched practices. However, by moving towards a simpler and more equitable system, the government could address long-standing inefficiencies and reduce reliance on measures like the Grocery Tax, which often mask deeper structural issues.
