Submitted by Bill Fernie
2nd September 2026
There is a rather uncomfortable question waiting for Andy Burnham and Chancellor John Healey as they prepare for the October Budget.
Where exactly is the money going to come from?
The new Government has arrived in Downing Street promising change, better public services, more investment, greater regional equality and action on the cost of living.
But Britain is already carrying a very large tax burden, public spending pressures are enormous and the cost of government borrowing has suddenly become more expensive.
The arithmetic is becoming increasingly difficult.
This is not simply a question of whether taxes will have to rise. The more interesting question is who will be asked to pay them.
Because Britain does not have a single tax system in the practical sense. It has income tax, National Insurance, VAT, council tax, business rates, fuel duty, inheritance tax, capital gains tax, dividend taxation and a long list of other charges.
And people experience them very differently.
The rich already pay a huge share of income tax
There is a statistic which should be at the centre of any serious discussion about raising taxes.
The Government estimates that the top 1% of income-tax payers will account for about 26.6% of all income tax collected in 2026-27.
The top half of income-tax payers will account for roughly 90%.
That makes the argument that Britain should simply "make the rich pay" rather more complicated than it sounds.
Higher earners already provide a very large proportion of income-tax revenue.
But that does not mean there is no scope to raise more money from people at the top.
It means the Government has to think about wealth as well as income.
Someone earning £150,000 a year is relatively easy to identify for income-tax purposes.
Someone with a £5 million house, a substantial investment portfolio, valuable shares, business interests and other assets may have a very different tax profile.
That is where the political argument is likely to become increasingly interesting.
Income is not the same thing as wealth
Britain's tax system has traditionally concentrated heavily on income.
You earn a salary and you pay income tax.
You receive a pension and, above the relevant allowance, you may pay income tax.
You receive interest or dividends and they may be taxed.
But accumulated wealth is a different matter.
A house can rise substantially in value without creating an annual income-tax bill.
Shares can increase in value without being taxed until they are sold.
Business assets can appreciate for years.
That doesn't necessarily mean these people are avoiding tax. Much of this is perfectly legitimate under the existing system.
But it does raise an important question.
Should someone who earns £60,000 a year necessarily face a greater tax burden than someone whose assets have increased in value by hundreds of thousands of pounds?
That is the argument behind many proposals for wealth taxation.
But wealth taxes are not a magic money tree
There is a danger of assuming that taxing wealth would automatically solve the Government's financial problems.
It wouldn't.
Wealth is often difficult to value.
A house is worth whatever somebody is prepared to pay for it, but that doesn't mean the owner has the cash available to pay a large annual tax bill.
A family business may be worth millions on paper while producing a relatively modest income for its owners.
An investment portfolio can rise sharply one year and fall the next.
And once governments start taxing wealth, people naturally change their behaviour.
They may sell assets.
Move investments.
Change the way businesses are structured.
Or, in the case of very wealthy internationally mobile individuals, potentially move some of their wealth or even their residence elsewhere.
That is why simply announcing a wealth tax rate does not tell us how much money it will actually raise.
Property may be the easier target
One area where the argument is likely to become increasingly intense is property.
Britain has enormous amounts of wealth tied up in housing.
Some people own relatively modest homes and are already struggling with mortgage payments or other household costs.
Others own extremely valuable properties, sometimes worth several million pounds.
A property tax designed around the value of a home could therefore be highly progressive if properly structured.
There have already been reports of discussions around a possible mansion tax with a threshold as low as £1.5 million.
But even here there is a problem.
A £1.5 million house in one part of Britain is not necessarily occupied by someone who feels wealthy.
House prices vary enormously between regions.
A property owner in London may have millions of pounds of housing wealth while earning a relatively ordinary salary.
Meanwhile, someone running a successful business in a rural area might have substantial assets tied up in property but very little spare cash.
That makes property taxation particularly sensitive outside the South East.
The danger of taxing the middle by accident
This is where Burnham's Government needs to be careful.
There is an understandable political desire to protect lower-income households from further tax increases.
But the easiest taxes to collect are often the ones that affect millions of people.
Raise VAT and the money arrives.
Freeze income-tax allowances and more people gradually enter higher tax bands.
Increase National Insurance and the revenue is relatively predictable.
Raise fuel duty and the Treasury receives money from millions of motorists.
The problem is that these taxes do not distinguish particularly well between households that are genuinely wealthy and those that are simply trying to manage a modest income.
Britain has already experienced something similar through frozen income-tax thresholds.
The personal allowance and other thresholds have remained fixed while wages and pensions have increased.
The result is fiscal drag.
People who never considered themselves high earners can gradually find themselves paying higher rates of tax.
More than a million pensioners are now reportedly paying higher or additional rates of income tax, more than double the number five years ago.
That is a warning for any government tempted to raise money quietly rather than announce an explicit tax increase.
There is another possibility: tax wealth when it changes hands
Rather than imposing an annual wealth tax, governments can concentrate on taxing the movement or disposal of wealth.
Capital gains tax is an obvious example.
The Treasury collected a record £24.2 billion in capital gains tax in 2024-25, following previous increases in rates and changes to allowances.
And the distribution of that tax is striking.
Around 45% of the entire capital gains tax take came from people reporting gains of £5 million or more, despite that group representing less than 1% of taxpayers paying the tax.
That demonstrates why capital gains are so attractive to governments looking for additional revenue.
A relatively small number of very large gains can produce a considerable amount of tax.
But again, there is a limit.
Push rates too far and people have an incentive to hold assets rather than sell them.
The Government therefore has to balance the desire to raise revenue against the possibility that a higher tax rate produces less revenue than expected.
Could the answer be a broader tax base?
There is perhaps another route that is less politically dramatic.
Instead of dramatically increasing one tax, Burnham could look at the whole system and ask whether different forms of income should be taxed more consistently.
Why should income from employment be treated differently from income from investments?
Why should some forms of property income be treated differently from wages?
Why should capital gains sometimes receive more favourable treatment than earned income?
These are difficult questions because the tax system is also supposed to encourage saving, investment and entrepreneurship.
But there is a growing argument that Britain's tax system has become too complicated and contains too many different routes through which people can arrange their financial affairs.
The answer may not be simply more tax.
It could be a different tax system.
And then there is business
Businesses will inevitably be watching the October Budget closely.
The Government needs companies to invest, employ people and expand.
But it also needs additional revenue.
Increasing corporation tax or employer National Insurance may bring in substantial sums, but businesses can respond by reducing investment, increasing prices or restraining employment.
The effect can therefore come back to households.
A tax on business is not necessarily paid entirely by business.
Some of it can eventually appear in prices, wages or reduced investment.
That is why the question "Who pays the tax?" is more complicated than the name of the tax on the Treasury spreadsheet.
Burnham has an especially difficult choice
The new Prime Minister has made clear that he wants substantial change.
But today's financial markets have delivered an uncomfortable reminder that governments cannot simply spend their way out of Britain's problems.
Ten-year gilt yields have risen above 5.2%, their highest level in many years, with higher oil prices and inflation fears adding to pressure on borrowing costs. Analysts estimate that the Government's fiscal headroom has been reduced substantially.
That leaves the Chancellor with three broad choices.
Raise taxes.
Cut spending.
Or borrow more.
In reality, some combination of all three may be required.
The political temptation will be to concentrate tax increases on those perceived to be wealthy enough to afford them.
That is understandable.
But the Government needs to recognise that the very wealthy are already contributing a substantial share of income-tax receipts.
The bigger opportunity may lie in examining wealth, property, investment income and capital gains, where the tax treatment can differ significantly from ordinary employment income.
But don't forget the household in the middle
There is one group which governments often overlook in these debates.
The reasonably comfortable but not wealthy household.
They may own their home.
They may have some savings.
They may have a pension.
They may have worked for decades and built up modest investments.
They are not rich by any conventional definition.
But they can be surprisingly vulnerable to tax changes because they have moved beyond the income levels at which the state provides substantial support.
They pay income tax.
They pay National Insurance.
They pay VAT.
They pay council tax.
They may pay tax on savings and dividends.
They may eventually pay tax on a capital gain.
And they may receive relatively little in return apart from public services.
That household is already feeling the squeeze.
If the Government tries to raise substantial sums by simply increasing taxes on everybody who is not poor, it risks creating a political backlash of its own.
Perhaps Britain needs to ask a different question
The argument about tax is usually framed as:
How much more should we tax people?
Perhaps the better question is:
What should we tax?
If the objective is to protect lower-income households, then taxing essential consumption is difficult to justify.
If the objective is to encourage investment, repeatedly increasing taxes on business can be counterproductive.
If the objective is to raise more money from those with the greatest capacity to pay, then accumulated wealth, very large capital gains, expensive property and investment income deserve greater attention.
But none of this provides a painless solution.
Britain's public finances have reached the point where somebody is going to have to pay for the promises being made.
The only real question is who.
Andy Burnham has inherited an economy where the public wants better services, households want lower bills, businesses want lower costs and investors want evidence that the Government can control its finances.
Trying to satisfy all four will be extraordinarily difficult.
And that is why the October Budget could become a defining moment for the new Government.
It may tell us whether Burnham believes the answer is to tax incomes more heavily, tax wealth more heavily, reform the existing system, cut spending, borrow more, or some uncomfortable combination of all of them.
One thing is increasingly clear.
Britain cannot keep promising more while pretending that somebody else will always pick up the bill.
The real tax debate is no longer simply about rich versus poor.
It is about income versus wealth, work versus assets, today's taxpayers versus tomorrow's, and how much the British public is prepared to pay for the country it says it wants.
Scotland has already gone further on income tax
There is another complication in this debate, and it is particularly important in Scotland. The Scottish Parliament already has substantially greater control over income tax than it did a decade ago, and Scotland has used those powers to create a more progressive system than the rest of the UK.
For 2026-27 there are five Scottish income-tax rates, ranging from 19% to 48%. The higher rate begins at £43,663, while the 48% top rate applies to taxable income above £125,140. The Scottish Government says that around 55% of Scottish income-tax payers are expected to pay less income tax than they would under the system applying elsewhere in the UK.
But the other statistic is perhaps more revealing. The Institute for Fiscal Studies estimates that 26.3% of Scottish income-tax payers are now expected to pay at least the higher rate, compared with 21.9% across the UK. A decade ago the Scottish figure was just 12.1%.
That is a significant change. It means the argument that Scottish taxation affects only a small group of very high earners is becoming less convincing. As wages rise and thresholds remain frozen, more ordinary professional and managerial workers are being drawn into the higher-rate system.
And this is where Scotland's experience becomes relevant to the wider UK debate. The Scottish Government has already discovered that raising the headline rates is not necessarily the same thing as raising the amount of money ultimately collected. The IFS estimates that the Scottish income-tax system will provide a net revenue gain of just under £1 billion in 2026-27 compared with the funding adjustment made to account for income-tax devolution. That is substantially less than the nearly £1.8 billion that the higher Scottish rates would raise if taxpayers simply continued behaving exactly as they had before.
Some of the difference is explained by Scotland's weaker earnings performance and changes in the industries that provide high-paid employment. But the IFS also points to behavioural responses, including tax planning, changes in working patterns and migration. It is a warning to any government that there is a point beyond which increasing a tax rate does not necessarily produce a proportionate increase in revenue.
That does not mean Scotland's approach has failed. It means taxation is more complicated than simply deciding that people with higher incomes should pay a higher percentage. The Scottish experience provides a useful laboratory for the UK as a whole.
For Andy Burnham and John Healey, this should be an important lesson. If Westminster needs substantially more revenue, simply copying Scotland and increasing the rates on higher earners may not provide the answer. Scotland already taxes higher earnings more heavily, and the evidence suggests that some of the expected additional revenue can be lost through changes in behaviour.
There is also a constitutional issue. Income tax is partly devolved, but many of the taxes that could become increasingly important in the Westminster debate, including capital gains tax, corporation tax, VAT and most taxes on wealth, remain matters for the UK Government.
That creates an intriguing situation. A wealthy person living in Scotland can face a higher rate of income tax than someone with the same income living elsewhere in Britain, while the UK Government still controls many of the taxes applying to wealth and investment.
If Burnham's Government really wants to shift the tax burden towards wealth rather than earnings, Scotland therefore provides an interesting test case. It has already moved further towards taxing income progressively. The next question is whether the UK should move further in the direction of taxing wealth, property and investment instead.
That may ultimately be a more important question than whether the top rate of income tax should be 47%, 48% or 50%.