Rebuilding the UK tax system: fairness, growth, and the renewal of the social contract

For nearly two decades, ambition and aspiration in our country have been held back. There is an increasing sense of a country where people cannot get on, where hard work goes unrewarded; of a system stacked against them. 

Britain’s economy should reward those who work, build, and contribute. This sense of unfairness is felt in everyday life. But if you are a small business owner – the backbone of the everyday economy – you can be disincentivised from growth by arbitrary VAT thresholds or strangled by punishing business rates while huge corporations pay less tax than you do in total, never mind proportionally. If you are a young family in the North East you may be paying the same council tax rate as a wealthy overseas investor in London as the services you depend on deteriorate. And if you are a worker you may find yourself paying higher tax rates than those whose income comes from wealth and assets. All of these people instinctively see a system stacked against them.

The purpose of the reforms I am setting out is simple: effort should lead to a better life, and the rules should not be rigged against those who follow them. It is ambitious, but it is also essential to restore fairness, support work, incentivise investment, tackle avoidance, and deliver sustainable funding for public services. As I have said elsewhere, the route out of our economic malaise cannot rely purely on a tax-and-spend approach; tax reform is an essential part of the solution.

For too long, fundamental reform has been ducked. Our tax system has evolved incrementally over decades, producing a framework that is increasingly complex, inconsistent, and poorly aligned with the demands of a modern economy. Spanning thousands of pages of legislation and guidance, it is characterised less by strategic coherence than by piecemeal adaptation.

This matters because taxation is not merely a mechanism for raising revenue. It is a central instrument of economic policy, shaping incentives to work, invest, and allocate capital. When poorly designed, it can entrench inequality, distort economic behaviour, and undermine long-term growth. Conversely, a well-designed tax system can support productivity, enable public investment, and sustain a fair social contract.

When the link between contribution and outcome weakens, trust in both the tax system and the wider economy begins to erode. Restoring that connection is essential – not only for fairness, but for rebuilding confidence that economic growth will benefit all parts of the country.

The UK faces a particularly acute challenge. Since the Global Financial Crisis, our economy has been marked by persistently low productivity growth, high regional inequality, and a legacy of underinvestment in both physical and social infrastructure as a result of 14 years of Conservative austerity.¹ At the same time, the tax burden has been steadily rising, now to historically high levels, yet without delivering sustained improvements in public services or any meaningful change in how the system itself operates.² This combination has contributed to a growing sense that the tax system is both ineffective and unjust.

In order to deliver meaningful economic renewal a fundamental redesign of the UK tax system is required. No more tinkering round the edges, but a full-scale reform agenda. Such a transformation must go beyond incremental adjustments to establish a coherent framework grounded in clear principles: supporting work and productivity, incentivising investment and risk-taking, reducing avoidance and complexity, and ensuring sustainable funding for public services. The challenge is not technical but political, requiring careful sequencing, clear communication, and sustained commitment.

The case for Reform: fairness, effi  ciency, and legitimacy

The case for tax reform in the UK rests on three interrelated grounds: distributional fairness, economic efficiency, and political legitimacy.

First, the current system performs poorly on distributional grounds. Wealth in the UK is highly concentrated: as of 2022, the top 10 per cent of households hold approximately 43 per cent of total wealth, while the bottom 20 per cent hold around 0.5 per cent.³ Moreover, this disparity has widened significantly in recent years, with estimates suggesting that the wealth gap has increased by around 50 per cent since the mid-2010s.⁴ For many households, this is not an abstract imbalance but a lived experience: the sense that work is taxed more heavily than wealth, and that the system does not reward effort in the way it should.

Second, the system generates significant economic inefficiencies. Differences in the treatment of labour and capital income create incentives for tax avoidance and exploiting loopholes, encouraging individuals and firms to structure their affairs in ways that minimise tax rather than maximise productivity, which in turn hits our economic performance.⁵ Features such as the VAT registration threshold introduce sharp ‘cliff edges’ that discourage firms from expanding beyond certain size thresholds. Business rates and property transaction taxes can further distort investment decisions, discouraging mobility and dampening future investment.⁶

Third, the system is increasingly perceived as lacking legitimacy. Many of its core components are outdated or poorly understood. Council Tax, for example, remains based on property valuations from 1991, resulting in highly regressive outcomes in many areas.⁷ Stamp Duty Land Tax (SDLT) makes it harder for people to move home by creating substantial transaction costs.⁸ At the same time, the proliferation of reliefs, exemptions, and differential rates has made the system opaque, reducing public trust and complicating compliance.⁹

Taken together, these issues reflect a deeper problem: the tax system has been treated primarily as a set of levers for raising revenue for the Exchequer without clearly demonstrating what citizens receive in return, rather than as a coherent framework for shaping economic outcomes for taxpayers. Addressing this requires a shift in both design and approach.

Principles for a modern tax system

A reformed UK tax system should be grounded in a clear set of principles that align fiscal policy with long-term economic performance and the renewal of the social contract. These principles should guide not only the design of individual taxes but the structure of the system as a whole.

First, the system must be fair. Those with the greatest ability to pay should contribute more, and similar types of income should be taxed in similar ways. This ensures that the burden of taxation is shared fairly and that no group can benefit from lower rates simply because of how their income is structured. Fairness is not only a moral principle: it is essential to public support for the system.

Second, the system must be simple and robust. Complexity increases costs, creates confusion, and opens the door to avoidance and evasion. A simpler system, with fewer reliefs, clearer rates, and more consistent treatment across different forms of income and assets, would be easier to understand, harder to exploit, and more trusted by the public.

Third, the system must support growth and economic security. Taxation should not discourage work, investment, or enterprise. Instead, it should create the conditions for businesses to grow, for individuals to take opportunities, and for investment to flow to the most productive parts of the economy. Stability and predictability are central to this: people and firms must be able to plan for the long term with confidence.

Fourth, the system must clearly link contribution to outcome. People are more willing to pay tax when they can see what they receive in return – whether in public services, infrastructure, or economic opportunity. Strengthening that connection is essential to rebuilding trust. While a significant share of the public supports maintaining or increasing taxation to fund public services, trust in the state’s ability to spend that money effectively remains limited.¹⁰ A credible tax system must therefore be matched by visible delivery.

Finally, the system must raise sufficient and sustainable revenue. The level of taxation should reflect the services and security that government is expected to provide. In the face of rising pressures – from an ageing population to increased demands on health and social care – the system must provide a stable foundation for public investment and long-term economic resilience.

Taken together, these principles point to a shift away from reactive, piecemeal policymaking toward a more strategic approach; one that treats taxation not purely as a way of raising revenue, but as a central pillar of economic policy and the social contract.

Priority areas for reform: restoring fairness and supporting growth

A fair tax system must ensure that work is rewarded and that individuals feel secure in the knowledge that effort will be recognised. In practice, reform should be clearly focused on three priorities: property taxation, incentivising employment, and supporting economic growth.

The central reform must involve introducing a new national property and land tax, replacing Stamp Duty, and reducing Council Tax. Reforming property taxation is central to restoring fairness and rebuilding the link between what people contribute and the services they receive. The goal is clear: to make the system fairer for households by ensuring that those with the most valuable property contribute more, while reducing the burden on those who have seen bills rise without a corresponding increase in their living standards. 

As already mentioned, Council Tax is widely recognised as regressive and outdated, with property bands based on valuations from over three decades ago. 

This leads to deeply unfair outcomes, where a high-value property in central London can face a similar bill to a modest family home elsewhere, despite vast differences in underlying wealth. An immediate step should be a full revaluation alongside the introduction of additional bands at higher property values, as announced by the Chancellor at the Budget in November 2025. This would shift more of the burden onto those best able to pay, while helping to ease costs for ordinary households. 

However, these steps should be part of a wider shift. Rather than fully replacing Council Tax as some have argued, it should be significantly reduced and refocused so that it returns to its primary aim: funding genuinely local services. In practice, that means lower and more proportionate bills for many households, alongside a clearer link between what people pay locally and the services they receive.¹¹ The current system of Council Tax and Stamp Duty should then be complemented by a national property and land tax. 

At the same time, funding for social care and other social services should be nationalised and distributed more fairly through a national funding formula, reducing reliance on regressive local tax bases. This would ensure that access to essential services is not determined by local property wealth, but by need. Stamp Duty, as a tax on moving home, discourages people from moving and means homes are not always used in the way that best suits people’s needs. It should therefore be removed as part of this wider reform.¹² The system should also strengthen the taxation of land, including through measures such as taxes on undeveloped land whilst protecting agricultural land. These reforms would improve the efficiency of land use while providing a stable revenue base.

A reformed system would make clearer what households contribute and strengthen the connection between taxation and local services. Proposals to use property-based taxes to support social care funding illustrate this potential alignment.¹³

The second priority is to ensure the system stops favouring income from wealth over income from work. Differences in the taxation of employment, self-employment, and capital income allow individuals to reclassify income in ways that reduce their tax liability without creating any additional economic value.¹⁴ More complex forms of avoidance can exploit insolvency and bankruptcy rules, allowing liabilities to be minimised or deferred.¹⁵

Capital Gains Tax (CGT) should be brought closer to Income Tax rates. The current difference in rates creates incentives for individuals to shift income into lower-taxed forms, effectively lowering the rates they pay on money they earn.¹⁶ Such alignment should be accompanied by measures, such as inflation indexation, to ensure that genuine investment returns are not unduly penalised.¹⁷ This reform is central to restoring confidence that the system does not favour those able to structure their income over those earning through work. It would shift the taxation burden away from punishing work, and towards unproductive capital accumulation which does little to grow the everyday economy.

The taxation of inherited wealth raises important questions of intergenerational fairness. The current system is characterised by numerous exemptions and reliefs, limiting its effectiveness and perceived legitimacy in the eyes of the public.¹⁸ At a minimum, reforms should address specific loopholes, such as the Capital Gains Tax uplift at death, which allows unrealised gains to escape taxation entirely.

Thirdly, the tax system must actively support business growth, not hold it back. Tax reform must support visible economic improvement: higher wages, more investment, and stronger local economies. This should include targeted cuts to business rates and reforms to VAT thresholds where they discourage firms from growing.¹⁹

Reforming the VAT threshold would remove disincentives to growth, while changes to business rates could encourage investment in property and productive assets. The VAT registration threshold creates a strong disincentive for firms to grow beyond a certain size, contributing to the UK’s “missing middle” of midsized firms.²⁰

Support must ensure that small businesses are not held back by the system, but are able to  grow and succeed, so that those who work hard to build a business can expand, create jobs, and see the rewards of that effort.²¹ Targeted reforms, such as revisiting reliefs for empty property or enhancing R&D incentives, should form part of a wider strategy to support investment and innovation.²²

Across all three areas, reform must also reduce complexity and limit opportunities for avoidance. Tackling avoidance is not only about raising revenue, but about ensuring that everyone contributes fairly. This includes reducing the gaps between how different types of income are taxed, simplifying reliefs, and strengthening enforcement capacity.²³ As it stands the tax system rewards those who game it, with those businesses who play the rules forced to pick up the tab. A simpler and more coherent system would not only reduce avoidance but also improve transparency and public trust.

While there is broad agreement on the reforms needed, securing public support remains a significant political challenge. Many reforms, particularly concerning domestic properties, create identifiable losers, even where they generate broader gains for the wider economy. For that reason, public support for reform depends on people being able to see both the fairness of the changes and the benefits they deliver in practice. Visible improvements in public services and local economies will be essential if that support is to be sustained.

The UK’s tax system is no longer fit for purpose. Its complexity, inefficiencies, and perceived unfairness undermine both economic performance and public trust. 

Rebuilding the UK tax system is ultimately about renewing the social contract. That, in turn, is essential to delivering both economic security and shared prosperity across every part of the country. From families who are working hard and paying their bills to business owners trying to invest in their workforce and their community, people are prepared to pay their fair share as long as they see everyone doing the same. So, whether it’s the council tax bill, income, corporation or inheritance tax, we need to make sure that our tax system, across the board, is fair, incentivises work and encourages” with “is fair, incentivises work, and encourages productive economic growth.

Louise Haigh has been the Labour MP for Sheffield Heeley since 2015. 

Notes

1. OECD, OECD Compendium of Productivity Indicators 2025, OECD Publishing, 2025.
2. Economic and Fiscal Outlook: November 2025, Office for Budget Responsibility, 26 November 2025.
3. Household Total Wealth in Great Britain: April 2020 to March 2022, Office for National Statistics, 24 January 2025.
4. Simon Pittaway, Wealth Check: What the new Government needs to know about household wealth as it navigates the challenges ahead, Resolution Foundation, 2024.
5. Stuart Adam and Helen Miller, Taxing Work and Investment Across Legal Forms: Pathways to Well-Designed Taxes, Institute for Fiscal Studies, 2021.
6. Adam Corlett, Revenue and Reform, Resolution Foundation, 10 September 2024.
7. Stuart Adam, Louis Hodge, David Phillips and Xiaowei Xu, Revaluation and Reform: Bringing Council Tax in England into the 21st Century, Institute for Fiscal Studies, 2020.
8. Pedro Serôdio and David Lawrence, Duty Free Homes: Reforming Property Tax for Growth and Revenue, Centre for British Progress, 14 November 2025.
9. Treasury Committee, Tax Reliefs, UK Parliament, 2023.
10. National Centre for Social Research, ‘British Social Attitudes’, www.natcen.ac.uk; Office for National Statistics, ‘Trust in government, UK: 2023’, www.ons.gov.uk, 1 March 2024.  
11. Aditi Sriram and Carsten Jung, Towards a fair and proportional property tax, IPPR, 14 November 2025.
12. OECD Tax Policy Studies, Housing Taxation in OECD Countries, OECD, 2022; Alex Morton, Stamping Down: Why Cutting Residential Stamp Duty is Easier than You Think, Centre for Policy Studies, 27 October 2019; Andy Summers, Arun Advani, Carsten Jung, Chris Belfield, Dan Neidle, Hannah Peaker, James Howat, James Lawson, Robert Colvile, and Ryan Shorthouse, Tax Reforms for Growth, Centre for Policy Studies, 2025; Tim Leunig, A Fairer Property Tax, Onward, 17 August 2024; Pedro Serôdio and David Lawrence, Duty Free Homes: Reforming Property Tax for Growth and Revenue, Centre for British Progress, 14 November 2025.
13. Dan Mead, Fixing the shop front of the state, Labour Together, 2026.
14. Bill Dodwell, Patricia Mock, and Sally Campbell, Thresholds in the Tax System: Policy and Administrative Considerations, Institute for Fiscal Studies, 2024; Stuart Adam, Isaac Delestre, and Helen Miller, Options for Tax Increases, Institute for Fiscal Studies, 2025.
15. Stuart Adam and Helen Miller, Principles and Practice of Taxing Small Business, Institute for Fiscal Studies, 2019.
16. HM Revenue & Customs, ‘Tax Abuse Using Company Insolvencies’, www.gov.uk, 11 July 2019.
17. Office of Tax Simplification, ‘OTS Capital Gains Tax Review: Simplifying by Design’, www.gov.uk, 11 November 2020; Stuart Adam, Arun Advani, Helen Miller, and Andy Summers, ‘Capital gains tax needs serious reform, not just more tweaks’, www.ifs.org.uk, 6 October 2024; Arun Advani, Andrew Lonsdale, Andy Summers, Reforming Capital Gains Tax: Revenue and Distributional Effects, CenTax, October 2024.
18. Arun Advani and David Sturrock, Reforming inheritance tax, Institute for Fiscal Studies, 17 October 2023.
19. HM Treasury, ‘Transforming Business Rates: Interim Report’, www.gov.uk, 17 September 2025;  HM Treasury, ‘Business Rates and Investment: Call for Evidence’, www.gov.uk, 26 November 2025; HM Revenue & Customs, ‘Preliminary Estimate of the VAT Gap (2024–25)’, www.gov.uk, 3 March 2026, HM Revenue & Customs, ‘Tax gaps: VAT’, www.gov.uk, 19 June 2025.
20. Resolution Foundation, ‘Britain needs better taxes, rather than just higher ones, to boost fairness and economic growth’, www.resolutionfoundation.org, 28 June 2023; Li Liu, Ben Lockwood, and Eddy H.F. Tam, ‘Small Firm Growth and the VAT Threshold Evidence for the UK’, International Monetary Fund, 16 February 2024; Alex Mengden, ‘The UK Should Lower or Abolish, Not Raise, Its VAT Registration Threshold’, www.taxfoundation.org, 5 September 2025. 
21. Resolution Foundation, Ending Stagnation: A New Economic Strategy for Britain, Resolution Foundation, 2023.
22. British Property Federation, ‘BPF Response to Business Rates and Investment Call for Evidence’, www.bpf.org.uk, 12 February 2026.
23. National Audit Office, ‘Increasingly Complex Tax System Burdens Government and Business with Billions in Admin Costs’, www.nao.org.uk, 10 February 2025; The administrative cost of the tax system, National Audit Office, 2025.