Income tax U-turn: UK’s quiet tax habits are a warning for other countries
20 November 2025
Last Friday’s reveal by the FT about the drop the planned rise in income tax has triggered predictable political debate. But as a lecturer in taxation, I think the U-turn itself is not the most important part of the story. The real issue is the pattern beneath it, one that has been building for nearly two decades, under governments of every political stripe.
Successive UK chancellors, from Gordon Brown to George Osborne to Rishi Sunak and now Rachel Reeves, have relied on an expanding array of subtle, indirect, often poorly understood measures to raise revenue without appearing to do so. Threshold freezes, tapered allowances, withdrawn reliefs, and narrow behavioural incentives have collectively become a kind of policy “smorgasbord”: individually small enough that most people barely notice, yet together responsible for a rising tax burden.
These measures are often described as “stealth taxes”, but that phrase understates the scale of what has happened. This is not one stealth tax; it is dozens of techniques operating simultaneously across the system. Each avoids public scrutiny; each distorts behaviour; each raises a little extra money in the short term, but taken together they create a tax base that is increasingly complex, opaque and economically damaging.
Fiscal drag is the clearest example. Under Gordon Brown, threshold freezes became a convenient way to raise revenue without lifting headline rates. Conservative chancellors expanded the practice. Now the current government has adopted the same approach. The personal allowance has been frozen in cash terms since 2021–22, and the point at which it begins tapering away, £100,000, has been unchanged since 2010. Had it tracked earnings growth, it would now be well over £160,000. Instead, more people have been quietly pulled into higher marginal tax bands.
Despite this, tax paid by middle earners has, if anything, fallen over the past decade once income tax and employee National Insurance are combined. Recent analysis shows that someone on median full-time earnings now faces an effective tax rate of around 20–21%. Yet the overall tax burden, measured as total taxes as a share of GDP has risen sharply and is on course to reach record levels. The contrast highlights the core issue: governments have avoided raising broad-based taxes, and instead patched the system through narrow, cumulative measures that raise revenue inefficiently.
This temptation is not uniquely British. Across the OECD, governments face rising demands for public services, driven by ageing populations, healthcare costs, infrastructure needs and climate adaptation while remaining reluctant to raise visible, broad-based taxes. The UK is simply an early, clear example of where that logic leads.
The UK’s tax wedge for an average earner, the combined burden of income tax and social security contributions for a single worker is still below the OECD average (roughly 31% versus 35%). Yet these headline comparisons mask significant structural weaknesses. A system that leans on freezes and tapered allowances rather than deliberate design discourages work progression, complicates hiring decisions, and erodes predictability for households and firms.
Today’s labour market adds to the challenge. Unemployment has now risen to around 5%, and while no single tax change can be blamed, increasing employer National Insurance contributions in the last budget during a period of slowing growth clearly does not help job creation. When payroll taxes and threshold freezes interact in unpredictable ways, businesses become more cautious. Uncertainty is itself a drag on hiring.
This brings us to the cyclical pattern now entrenched in the UK. Only last year, Rachel Reeves described the major tax-raising Budget she inherited as a ‘one and done’ necessity, an implicit acknowledgement that the country could not sustain repeated rounds of ad-hoc revenue measures. Yet limited fiscal headroom has already brought policymakers back for more. When the Chancellor had the opportunity this week to use a straightforward rise in income tax to break out of the cycle (which was telegraphed by her press briefing earlier) to replace stealth-by-accumulation with a clearer and more deliberate approach, she chose not to take it. The decision appears linked to the Office for Budget Responsibility reportedly revising the fiscal shortfall from £30bn to around £20bn. A smaller black hole may make further postponement seem attractive, but it does nothing to address the structural pressures on the tax base.
The second cost of this approach is uncertainty. When thresholds are frozen for prolonged periods, or allowances sharply taper away at arbitrary income points, neither households nor firms can plan effectively. A worker may find that a modest pay rise triggers a marginal rate spike; a business may find it harder to predict labour costs. Uncertainty discourages investment, undermines labour mobility and suppresses productivity.
The third cost is democratic. A tax system that raises revenue primarily through quiet erosion rather than clear design makes it harder for voters to understand what they are paying for. Without transparency, governments lose the ability to build a stable coalition for reform. Public trust corrodes when tax outcomes feel accidental or confusing.
The UK’s experience offers a lesson that reaches beyond its borders. When policymakers avoid the difficult conversation about how to fund modern public services, either through spending restraint, broad-based taxes or structural reform, they inevitably drift toward piecemeal, indirect methods. At first, these appear to be a clever political compromise. Over time, they accumulate into a system that is less efficient, less fair and less supportive of economic stability.
The Budget on 26 November offers an opportunity to break with this pattern. But the broader lesson is international: hard choices can be postponed, but not avoided. The longer governments rely on hidden mechanisms and fiscal drag, the harder it becomes to build stable, credible tax systems capable of supporting modern economies.