UK tax pressures complicate Burnham's middle-earner pledge

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UK tax pressure on Burnham

Highlights

The UK's tax burden is projected to rise from 34.5 per cent of GDP in 2024-25 to a postwar record of 38.5 per cent in 2030-31, primarily due to the continuing freeze on tax thresholds.
Easier options for raising revenue, like taxing higher earners and financial services, are largely exhausted, increasing pressure on middle-income households despite manifesto promises to avoid direct tax hikes.
The IMF and Institute for Fiscal Studies warn that future significant revenue increases require broad tax reform, with options like expanding VAT coverage under discussion as targeted rises risk distortion and taxpayer flight.

Fiscal constraints and revenue options

As reported by the Financial Times, Burnham is trying to calm concerns over large tax increases while economists warn that raising substantial sums without affecting middle earners is becoming harder. The pressure comes as the UK's tax burden is set to rise from 34.5 per cent of GDP in 2024-25 to a postwar record of 38.5 per cent in 2030-31, according to the Office for Budget Responsibility.

The biggest driver is the freezing of tax thresholds, a policy extended by chancellor Rachel Reeves in November's Budget. That approach is drawing more low earners into the tax system and pushing others into higher bands, even as higher earners account for a growing share of income tax receipts.

Unions are pressing for heavier taxation of wealth, including aligning capital gains and income tax rates and increasing taxes on banks. But Dan Neidle, a tax lawyer and commentator, says the long-running approach of taxing higher earners and financial services more heavily has largely exhausted the easier options, leaving few clear paths to higher revenue that do not reach middle-income households.

Isaac Delestre of the Institute for Fiscal Studies says recent tax increases have been concentrated on higher earners, though middle-income groups have not escaped broader pressure. He warns that relying on a narrow group for more revenue carries risks because wealthy taxpayers may change behaviour, alter how they receive income or leave the country.

Policy promises and wider economic impact

Uncertainty over future tax policy remains high because there is no detailed manifesto, even as Burnham signals costly ambitions including easing the burden of student loans and increasing defence spending. At the same time, he is pledging to keep the state pension triple lock, maintain commitments not to raise the rates of income tax, national insurance or VAT, lower welfare spending by helping more people into work, and cut business rates for pubs and some family-owned firms.

Those commitments leave open the prospect of further tax changes after two rounds of increases under Reeves' budgets that raise 66 billion pounds. The IMF says in its annual health check of the UK economy that the long-term room for further revenue increases is becoming limited without deeper tax reform, while still pointing to less distortive options such as broadening the range of products subject to VAT.

Ruth Curtice of the Resolution Foundation says the high overall tax burden does not eliminate scope to raise more money, but manifesto constraints leave few options that do not worsen distortions in the tax system. One closely watched area is capital gains tax, though UK officials believe a simple further rate rise could ultimately reduce revenue because of behavioural effects.

Curtice argues that broader reform, including changes to the treatment of inflation, tax on death and the risk of taxpayers moving abroad, could improve the system while raising revenue. Neidle says he would prefer growth-focused reform such as changes to corporation tax and a simpler VAT regime, but fears the result may instead be only limited adjustments.

Our previous analysis on the shrinking financial return of a UK university degree showed that lifetime gains for graduates have fallen well below earlier estimates, as earnings underperformed and policy changes increased the drag from taxes and student-loan/maintenance rules. It also noted that a growing share of graduates may now be financially worse off than comparable non-graduates, highlighting how fiscal policy choices are reshaping the distribution of costs and benefits.

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