Aligning the Taxation of Work and Wealth

In most of the United Kingdom a pound earned through work is taxed at up to 62%. The largest estates, of £10m or more, bear 18% on average. Income from dividends, capital gains and property has long been taxed more lightly than the wages it competes with. This paper argues that these gaps are an accumulation of concessions, not a considered design, and proposes one principle in their place: a pound is taxed the same however it is earned.

Part of that principle is already government policy. From April 2027 the Treasury will tax property and savings income at rates set deliberately above those on other income, with the stated aim of taxing income from assets more fairly relative to work. The argument here is over method, not direction.

The paper sets out a costed programme that applies the principle across the whole system. National Insurance is abolished and replaced by a single progressive income tax. The employer share is recovered from profit, through a progressive corporation tax. Dividends, interest and capital gains are taxed as income. Council tax is replaced by a levy proportional to what a home is worth today. Inheritance tax keeps its rate; its allowances rise with prices again, its reliefs are confined to working farms and trading businesses, and assets held in trust bear the same 40% over a generation as at death. Where a published elasticity or costing exists, each measure is adjusted for behaviour on the Office for Budget Responsibility’s convention, and every figure is anchored to official statistics.

The measures this paper proposes make the tax system more progressive, and they raise money for the Treasury. On cautious assumptions, with every measure counted in the year the public finances record it, the package runs a deficit of £12bn in its first year, when only gains made after the Budget are taxed on the new basis and self-assessed tax is not yet due, and £13bn in 2028-29 as dividends paid early ahead of the reform unwind; it moves into surplus in 2030-31 and reaches £6bn by 2031-32 as the first cycle of the periodic revaluation builds. On the upper bound, it stays in surplus throughout, at between £4bn and £51bn a year. The hardest problems, including the higher tax on private pension income, profit-shifting by the most mobile multinationals and the politics of revaluing property, are addressed individually.