National Insurance, Tax Cliffs and Property Tax: Labour's Reform Test

A new dawn has broken in UK politics. The coronation of Andy Burnham as Prime Minister and the subsequent appointment of John Healey as Chancellor represents a major and unique opportunity to finally fix our tax system. The usual framing of ‘tax cuts versus spending’ is not working. The UK suffers from insipid growth, whilst ever-growing demands on government expenditure require ever-tightened budgets. Fixing the irregularities of the tax system would go a long way to addressing our growth problem, as well as potentially bringing more money into the Exchequer. Such a step aligns with core Labour principles which reward work and tax wealth fairly, putting more money back into the pockets of workers and parents. To do this, the Chancellor would need to design out all of the traps, tax all income the same way, and shift the burden onto property. Tax funds the services people rely on; this is about designing a better tax system, not creating a smaller state.

The first and most important reform is to fix the completely senseless tax cliffs baked into the system, where a ‘Manhattan skyline’ image of marginal rates lurching up and down creates severe disincentives to work harder and take risks. The £100,000 childcare cliff is the most egregious example: a parent earning £99,999 is far better off than if they earn £100,000, simply because they lose childcare subsidies. This has created a system in which people are artificially capped, with both private and public sector workers opting not to work overtime or take promotions because of the financial hit. The perverse incentives this creates not only damage the economy as a whole but will leave public services wanting. The solution is simple. As a report by the Centre for British Progress sets out, replacing this tax cliff with smooth tapers, where each family earning over the £100,000 mark pays a 3% per child surtax on those extra earnings. This would not only raise around £700m in 2029/30, but would also allow individuals to move up the income bracket without having to worry about a financial hit. 

Second, the Chancellor should roll National Insurance (NI) into Income Tax. NI is a stealth tax that only affects earned income and spares rent, dividends, and other passive income. A landlord pays no NI on rental profit, whilst a nurse pays NI on every hour worked. Merging the two into a single, honest Income Tax not only makes work pay, but simplifies the system and taxes unearned income on the same footing. This should mark the beginning of a shift away from taxing employees towards a focus on other forms of income, via a lower employee NI and a higher Income Tax. This is not to disincentivise other forms of income; these have their merits, but it is to lower the marginal cost of work, drawing more people into the labour market and thus growing the economy. 

Third, property taxes must be fixed. Council Tax is still based on 1991 valuations and is regressive, with modest homes taxed at higher effective rates than mansions. Stamp Duty Land Tax (SDLT) taxes moving houses, jamming the market and cutting labour mobility. Even the OECD has noted that transaction taxes damage productivity through dampening house turnover and labour mobility. If both SDLT and Council Tax were replaced with a single annual proportional property tax at around 0.5 to 1% of their current value, it could raise similar or even greater revenue than SDLT and Council Tax, whilst unjamming the housing market. This would be a pro-growth, progressive, and pro-devolution reform, giving local government a stable and fair revenue base. 

Finally, Stamp Duty on shares should be scrapped. The UK is an outlier in taxing share transactions, which raises the cost of capital and weakens London as a global financial hub. It would be both cheap to remove and signal to markets that Labour is serious about growth and capital markets, not just redistribution and decentralisation away from London.

Labour has the opportunity to engineer a tax system that rewards work, taxes wealth fairly, and removes the traps which take money out of people's pockets. Each reform works towards these goals. It is self-funded; the merged Income Tax and the property tax swap fund the cliff-edge fixes and the share duty cut, hence meaning it is a rebalancing of tax rather than an unfunded giveaway. Whilst the Tories and Reform pointlessly argue about who can shrink the state fastest, Labour should endeavour to build a system that stops punishing workers and parents, whilst protecting revenue to fund public services properly. The last government tinkered. It failed. This one should reform and build a system which finally rewards the people who work.

Image: Wikimedia Commons/No 10

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