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The Trouble with Taxing Fairly
Why the UK still struggles with progressivity
The UK enters 2026 with a tax system that is, in theory, progressive - but in practice, far more regressive than many assume. The headline rates of Income Tax and National Insurance suggest a system where the better‑off pay proportionately more. Yet once wealth, consumption, and structural quirks are factored in, the picture becomes far more uneven.
Structural shifts
At the core of the UK’s progressive framework are familiar instruments: Income Tax, National Insurance Contributions (NICs), Capital Gains Tax (CGT), Inheritance Tax (IHT), and Stamp Duty Land Tax (SDLT). Income Tax thresholds remain frozen for 2026/27, with the basic, higher, and additional rates unchanged. On paper, this looks stable. In reality, fiscal drag - the quiet pulling of more earners into higher tax bands - continues to raise revenue without explicit rate rises.
NICs, meanwhile, have become more burdensome for employers. The employer rate rises to 15% in 2025/26 and continues to shift more cost onto workers over time, with modelling suggesting that 50% of the burden will fall on employees in 2026. NICs are structurally regressive: they fall more heavily on earned income than on wealth, and contributions taper off at higher earnings.
The reality
The most striking evidence of regressivity comes from wealth taxation. Research published in 2025 shows that while income was taxed at an average of 32.9%, increases in wealth were taxed at just 4.1% between 2011 and 2020. When income and wealth are combined, the lowest‑income households faced an effective tax rate of around 44%, while the wealthiest paid just 21.5%. This is the heart of the UK’s regressive reality: wealth is barely taxed, and wealth is overwhelmingly concentrated at the top.
Recent reforms have nudged the system in a more progressive direction. CGT rates rise sharply in 2025/26 — from 10% to 18% for basic‑rate taxpayers and from 20% to 24% for higher‑rate taxpayers. Business Asset Disposal Relief also becomes less generous. These changes narrow the gap between taxes on labour and taxes on capital, though they still fall short of parity.
SDLT thresholds fall significantly in 2025, pulling more properties into the tax net and raising revenue, but this is a blunt instrument. Council Tax continues to rise by around 5% annually, a deeply regressive levy tied to 1991 property valuations that bear little resemblance to modern wealth distribution.
New directions
Looking ahead to 2026, several shifts are likely. First, the government’s own modelling of “illustrative tax changes” for 2026–27 suggests that further adjustments to rates and thresholds are being actively explored, particularly around CGT, IHT, and NICs. Second, the political pressure to tax wealth more effectively is intensifying. Proposals gaining traction include:
- aligning CGT rates fully with Income Tax;
- introducing a proportional annual wealth tax;
- reforming Council Tax into a modern property‑value‑based system;
- closing reliefs that disproportionately benefit high‑wealth households.
The UK’s tax system in 2026 is therefore at a crossroads. It retains the architecture of progressivity but delivers outcomes that are, in aggregate, regressive. The question for policymakers is no longer whether reform is needed - the evidence is overwhelming - but whether they are willing to confront the structural privileges embedded in the system.
If 2025 was the year of incremental tweaks, 2026 may be the year the UK finally begins to reckon with the imbalance between taxing work and taxing wealth.
