By Isabel Downer
The UK policy body thinks that the rich should pay more tax: “those with the broadest shoulders should bear the heaviest burden”, a view that has been a familiar refrain in post-war British politics. Yet who, exactly, counts as broad-shouldered?
To answer this question, the tax system must draw the line between the rich and the rest –an intensely political line. The average man in the street, for instance, may know that more money is needed to fix the broken NHS but would rather someone “better-off” paid it.
In a country of stagnant wages, regional divides and inflation-eaten thresholds, those who are labelled rich feel more pressured than privileged. This creates a nation where the ranks of the “rich” are increasing, not because they are genuinely affluent, but because the system now defines them as such. Once, only a sliver of workers paid the 40% tax rate; by 2027 one in five is expected to do so. If a future, progressive government truly wishes to raise meaningful tax revenue, it will have to redraw tax bracket lines and risk angering many of the voters it needs to keep.
Geography further complicates who counts as rich. A salary of £60,000 in London, enough to breach the higher-rate band, hardly guarantees comfort once housing, childcare and student loan costs are paid. In Leeds, the same salary buys a far easier life. Nearly 43% of 25-34 year olds in the capital spend over 30% of their income on housing, compared with just 8% in the North East. The tax code, however, makes no such regional distinction: it has quietly redefined who counts as rich, even as living standards stagnate. In modern Britain, wealth depends as much on postcode as on pay slip.
UK income tax ‘bands’ – are they elastic?
Consider England and Wales, for example. There are three tax bands for annual earnings over £12,570: a ‘Basic rate’ set at 20% up to £50,270; a ‘Higher rate’ of 40% from £50,270 to £125,140 and an ‘Additional rate’ of 45% over £125,140.
While these bands have been changed over the years, a hidden factor has increased government tax revenue – “fiscal drag”. Not a show at the Edinburgh Fringe, but the combination of frozen thresholds with rising inflation and increasing earnings. As a result, there has been a near-quadrupling of the share of workers paying higher rates. This “stealth tax” has sharply eroded household purchasing power, making it harder for families to manage rising costs even though headline tax rates remain unchanged. However, such a stealth tax is useful for government, as it increases revenue without facing the same electoral backlash as raising income tax rates.
There is also a marked shift in the typical occupations paying tax in each band. In the 1990s almost no nurses and very few teachers paid the higher rate, but by 2027-28 more than one in eight nurses and one in four teachers will. Along with the introduction of an additional higher top rate of tax in 2010, the goalposts have clearly shifted around the national definition of ‘wealthy’.
Rich or Poor – where does the money come from?
So, who really pays for the modern British state? The UK distribution of taxpayers is skewed: a relatively small proportion of high earners contribute to the majority of income tax revenue. The top 10% of taxpayers contribute over 60% of all income tax receipts, while a significant proportion of the population pay little to no net income tax once transfers and benefits are considered. That leaves the Treasury perilously dependent on a small pool of higher earners – this is an awkward reality in a democracy that likes to imagine the rich as someone who doesn’t contribute to government revenues.
Given this imbalance, there is a constant, political tug-of-war between emotion and arithmetic. To some, calls for higher taxes are fuelled by envy, not fairness. To others, the reliance on high earners makes the system fragile. Policymakers must reconcile fairness with fiscal stability and ask the harder questions: does our tax system discourage work? Is income the only way to identify who the rich are?
Income vs Wealth: the case for taxing wealth, not work.
The UK tax system is set up in a way that mistakes high earners for the truly wealthy. It taxes income heavily, while leaving other forms of wealth such as property, pensions and inheritance relatively untouched. This has created a country where a young professional may be classified as “rich” by the tax code but could still struggle to buy a home. However, an older homeowner with a paid off mortgage, generous pension and substantial investment portfolio enjoys far greater financial security with a lower tax burden.
Inequality has grown so much since the 1980s, the Equality Trust even estimates that now the 50 richest families in the UK hold more wealth than half of the population combined. Some are arguing that this inequality is a fundamental flaw that needs to be addressed in the UK economy. Should the UK change from a system focusing on taxing flowing income to one that addresses accumulated wealth? The current system blurs the line between those who are temporarily high earners and those who are truly affluent. Which results in creating a growing generational divide, where younger workers shoulder a rising tax burden and older, asset-rich Britons benefit from a system that protects accumulated wealth more than it rewards work. Perhaps policy should distinguish between those who earn much and those who own much, though this remains controversial politically.
Some argue that taxing wealth directly, through inheritance tax, would be fairer. But inheritance tax would have to be raised substantially to generate the kind of revenue that changes to income tax could deliver. Others counter that adjusting income tax bands by raising the thresholds in line with inflation would better reflect the rising cost of living and ease the squeeze from fiscal drag. However, both paths carry risk: higher thresholds could widen inequality and strain public finances, while heavier taxes on assets risk discouraging aspiration and fuelling resentment among those who already feel unfairly targeted.
Britain’s income tax system is a historic system, built for a mid-20th century labour market, which is now struggling to account for 21st-century wealth. Until Britain musters the courage to reform its tax system and address historic levels of inequality, the line between “comfortable” and “rich” will remain misleading for as long as it is politically convenient. In a country where the definition of “rich” has become contested, the real challenge for policymakers lies in striking a balance between fairness and economic sustainability.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
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