THE GENERATIONAL RESET

Economic Reform: Companion Document

Why the wealthy don’t pay their stated rate, and why the system was designed that way. Read alongside How Tax Actually Works and the Economic Reform pillar.

Executive Summary

The UK’s tax system is presented to the public as progressive: those who earn more pay more. The headline rates support this story. Income tax rises to 45%. Inheritance tax is 40%. The numbers look serious, but for anyone wealthy enough to afford good advice they are largely fiction.

This pillar makes four arguments. First, for the very wealthy, a web of reliefs, reclassifications and structures separates the UK’s stated tax rates from the rates actually paid. All of it is legal, and all of it is heavily used. Second, these are not accidental loopholes. The system has been designed, maintained and regularly refined by the people who use it. Third, the tax base itself is badly designed: it leans heavily on taxing work just as AI begins to erode earnings from work, while a growing stock of asset wealth is barely touched. Fourth, international comparison shows the UK is not a high-tax country but a wrongly taxed one, raising revenue through regressive taxes while wealth at the top grows largely untaxed.

The myth here is not that the wealthy pay nothing. They pay a great deal in absolute terms. The myth is that they pay anything close to their stated rate, and that the system treats a pound of capital income the same as a pound of earned income. It does not. That gap was the point when the system was built, and it is the point today.

Key Proposals

1. The Diagnosis

The UK tax system was not designed in one go. It built up over a century of political decisions, each made in response to lobbying, electoral pressure, and the quiet influence of those with the most to gain. The result looks progressive, is regressive at both ends in practice, and can be exploited in between by anyone wealthy enough to navigate it.

At the bottom of the income distribution, taxes on spending dominate. VAT at 20% is a flat rate, but measured against income it is regressive: lower earners spend more of their income, so more of it goes in consumption tax. ONS data for 2023-24 finds VAT and other indirect taxes take 21.0% of gross income for the poorest fifth of households, against 7.5% for the richest.¹ This is contested on a different measure, and both sides deserve stating. Measured against spending instead of income, IFS research using 2016-17 data found indirect taxes took a similar 13–16% of spending across all income groups, "broadly distributionally neutral".¹ The ONS's own 2023-24 figures on that measure show the same pattern, 15–17% for every fifth of households. The difference arises mainly because the lowest-income group includes households whose spending temporarily exceeds their income, rather than people in permanent poverty. Both measures are legitimate and answer different questions. The reduced and zero VAT rates on food, children’s clothing and other essentials are a deliberate attempt to make VAT more progressive, and without them the spending-based result would probably turn regressive too. Fuel, alcohol and tobacco duties add to the regressive effect on either measure. Council tax may be the most openly regressive tax in the system: the top band in England covers every property worth £320,000 or more at 1991 values, roughly £1.5 million or more today, so a £1.5 million house and a £15 million house pay the same. A system that asks least of the wealthy through wealth taxes asks most, proportionally, of the poorest through taxes on spending.

At the top, different mechanisms apply. Earned income (salary, wages, employment) is taxed at up to 45%, plus National Insurance. But the wealthy rarely receive their income that way. They receive it as capital gains, dividends, carried interest and returns from financial assets, all taxed at lower rates, mostly free of NI, and sometimes deferred, sheltered or eliminated altogether through the methods described in this pillar.

National Insurance makes this worse. NI is charged only on earnings, not on dividends, capital gains or rental income. Employees pay 8% on earnings up to £50,270 and 2% above that. Someone paid a £100,000 salary pays NI; someone who receives £100,000 in dividends pays none. An owner-director can pay themselves a salary below the NI threshold and take the rest as dividends, a routine arrangement, and legally avoid a charge their employed equivalent cannot.

Withdrawing the personal allowance between £100,000 and £125,140 creates an effective marginal rate of 60%, higher than any stated rate in the system, which most people do not know exists and HMRC does not explain clearly. This hidden band hits upper-middle earners rather than the very wealthy, because the very wealthy moved their income out of the category it applies to long ago.

2. The Steel Man: What the System’s Defenders Would Say

These points are accurate. The wealthiest do pay large absolute sums, and recent reforms have moved toward closing gaps. This pillar does not claim the wealthy pay nothing. It argues that the claim "the wealthy pay their share" misleads, for three reasons.

First, the 60% income tax figure is accurate but misleading. The top 10% of households hold 41% of all UK wealth³ and pay 60% of income tax receipts. At first glance that looks progressive, since they pay a larger share of tax than their share of wealth. But the comparison sets tax paid on income against wealth held, two different things, and the result flatters. The returns on that 41% of wealth (capital gains, dividends, rental income, rising asset values) are mostly taxed at much lower rates, or not at all in a given year. A system that taxes the income the wealthy receive, while leaving their wealth and its main returns largely alone, will always produce a statistic that looks progressive. The statistic is real; the progressivity is not. At the very top, effective rates collapse: Rishi Sunak paid 23% on £2.2 million of income, and James Dyson paid tax equal to 0.68% of his total wealth in 2024.⁴ The top 10% as a group includes doctors, barristers and senior managers who do pay 40–45%. The truly wealthy, for whom the full range of reclassification, trusts and avoidance is available, pay a far lower effective rate that the aggregate figure hides.

Second, the reforms are slower and weaker than presented. Carried interest was exploited for decades. Raising CGT from 20% to 24% still leaves a gap of 21 percentage points against the top income tax rate.⁵ The announced reforms close particular routes; none of them redesigns the system.

Third, each time a route is closed, advisers find or build another. The contest between HMRC and private client advisers is a permanent feature of a system with over 1,000 tax reliefs⁶, each open to exploitation in combination with others.

3. How Avoidance Works

The mechanisms below are legal. Almost all were deliberately legislated, and several are sold as products by wealth management firms. Describing them is not an accusation of wrongdoing. It shows how the system works, as opposed to how it is described.

3.1 Salary to Dividends

Owner-directors pay themselves a small salary, usually just below the NI threshold, and take the rest as dividends. From 2026/27, dividends are taxed at 10.75%, 35.75% or 39.35% depending on income band (2 points higher on the first two bands than the year before, which narrows the gap without closing it), and carry no National Insurance. A director taking £150,000 in dividends still saves a substantial sum compared with taking it as salary. The arrangement is simply unavailable to anyone who works for someone else, and routine for anyone who does not.

3.2 Capital Gains: The Rate Gap

Earned income attracts up to 45% income tax plus National Insurance. Capital gains on most assets are taxed at 24% for higher-rate taxpayers and 18% for basic-rate taxpayers, at a flat rate however large the gain. Business Asset Disposal Relief cuts the rate on qualifying business sales to 18% from April 2026 (14% in 2025/26).

The method: take pay as equity rather than salary, hold it for the qualifying period, and sell. Income that would have been taxed at 45% plus NI as salary is taxed at 18–24% as a capital gain. This is standard practice for technology founders, senior executives with share options, and private equity professionals. The higher the earnings, the stronger the incentive to turn them into capital.

Only 584,000 people paid CGT in 2024/25, about 1% of adults.⁷ Even that was a record, up 45% in a year, as cuts to the tax-free allowance brought more people in and others sold assets before the CGT rate rise of October 2024.⁷ Fewer than 3% of UK adults paid it even once between 2010/11 and 2019/20.⁷ Within that small group, gains are highly concentrated: the top 5,000 taxpayers received 52.2% of all gains in 2020, an average of £6.815 million each, and the top 50,000 received 86.4%.⁸ On the receipts side, 45% of all CGT due for 2024/25 came from people with gains of £5 million or more in that year, fewer than 1% of everyone who paid it.⁷

The October 2026 Budget left the main rates of capital gains tax unchanged. It added a new 10% Founders' Relief on up to £10 million of lifetime gains for qualifying founders, costing about £180–300 million a year, and halved the lifetime limit for Business Asset Disposal Relief to £500,000, raising a similar amount, so the two roughly cancel out. The extra tax it sought from income on assets came instead from raising income tax on savings and property income by a further two percentage points from April 2027.⁹ The Budget documents give no reason for leaving the main rates where they are.

3.3 Carried Interest: The Most Blatant Reclassification

Private equity fund managers receive "carry", a share of fund profits, as their main pay for managing other people’s money. Economically, it is a performance fee for an investment management service. For decades it was taxed as a capital gain at 28%, raised to 32% for 2025/26. Since April 2026 it has been brought into the income tax system and taxed as trading income. The reform matters. That it took decades of lobbying and three governments to achieve matters more.

3.4 EIS and SEIS at Scale

The Enterprise Investment Scheme gives 30% income tax relief on up to £1 million a year invested in qualifying companies. Where that relief is claimed, the shares are free of CGT when sold. Gains on other assets can also be deferred by investing them in EIS, with the deferred gain becoming taxable only when the EIS shares are sold.

A high earner facing a £500,000 tax bill invests £1 million in EIS companies and claims £300,000 of income tax relief, with any gains on those shares free of CGT and other gains deferred indefinitely. The aim, funding early-stage businesses, is real. But only people with capital to deploy at scale can use the relief, and the qualifying rules are loose enough to allow a great deal of tax engineering alongside any commercial purpose.

3.5 Inheritance Tax: The 40% That Is Not 40%

IHT is charged at 40% above £325,000. Large estates pay far less in practice¹⁰, through a set of reliefs that together hollow out the stated rate:

• Business Property Relief: until April 2026, qualifying business assets got 100% relief with no upper limit. Since then, 100% relief covers the first £2.5 million per person of combined business and agricultural property, with 50% relief above that. Unused allowance passes to a spouse, so a couple can pass on up to £5 million of such assets tax-free on top of their nil-rate bands.¹¹

• P3 AIM shares: for decades, shares on the Alternative Investment Market qualified for 100% BPR after two years. A whole industry of "AIM IHT portfolios" grew up, sold to remove IHT with little connection to the relief’s original purpose of protecting trading businesses. Since April 2026, AIM shares get 50% relief, an effective IHT rate of 20%.¹¹ That narrows the shelter but does not close it: a portfolio of listed shares bought to cut inheritance tax still pays half the headline rate.

• The seven-year gifting rule: any amount can be given away and falls outside the estate after seven years. A billionaire can give £500 million to their children entirely free of IHT if they survive seven years. There is no cap and no means test.

• Pension pots: until reforms take effect in April 2027, pension funds sit entirely outside the estate for IHT. Wealthy people have used pensions as IHT shelters, living off other assets while the pension grew free of estate tax.

In practice IHT falls on the moderately wealthy who did not get good advice, not on the very wealthy who did.

Only 30,400 estates, 4.7% of all UK deaths, paid any IHT in 2023/24.¹² Within that small group, the tax is regressive at the very top. CenTax research on the system before the April 2026 reforms found that a quarter of estates worth over £10 million paid an effective rate below 9%, nowhere near 40%, and one in six £10 million-plus estates paid under 4% even leaving the spouse exemption aside.¹³ Business Property Relief did most of that work: it nearly halved the effective rate on estates over £30 million, from 23% to 12%, while cutting the rate on estates under £1.5 million by barely one percentage point.¹³ More than two-thirds of Business Relief went to around 400 estates a year, each claiming over £1 million. Fewer than one in five of those claiming it on shares had been a director of the business in the five years before death, which suggests most of the relief reached passive investors rather than the working owners it was meant to protect.¹³ Agricultural Relief was just as concentrated: almost two-thirds went to around 200 estates a year.¹³

3.6 Art and Collectibles: A Multi-Purpose Shelter

Fine art can shelter tax in at least five ways at once:

• Chattel exemption: artworks sold for less than £6,000 are exempt from CGT. Above that, marginal relief applies, often leaving a lower bill than on financial assets.

• Wasting asset exemption: works made from materials expected to degrade can be classed as wasting assets and exempt from CGT entirely, though HMRC may challenge this for valuable works.

• Freeport storage: wealthy collectors store art in freeports in Geneva, Luxembourg and Singapore, free of sales tax, import duties and capital gains tax.¹⁴ Because the assets are legally "in transit", they can stay untaxed indefinitely. The asset appreciates, but the tax clock never starts, and sales within the freeport can realise gains without triggering UK CGT.

• Acceptance in Lieu: the AIL scheme lets estates pay IHT by transferring culturally important objects to public institutions.¹⁵ A 25% "douceur", or sweetener, means an object offered under the scheme is worth 17% more to the estate than if it were sold at auction. The estate settles its tax bill on better-than-market terms, using objects the state must then house, maintain and insure indefinitely.

• Cultural Gifts Scheme: donors receive a reduction in income tax and CGT of up to 30% of the agreed value of donated works, spread over up to five tax years. A collector donating a work valued at £600,000 gets £180,000 off their tax bill.

These mechanisms can be combined. One collection can be held in an offshore trust (outside the estate) and stored in a freeport (deferring VAT and avoiding CGT on rising value), with pieces donated from time to time through the Cultural Gifts Scheme (cutting income tax) and the rest offered under Acceptance in Lieu on death (settling IHT at a premium). Art serves at once as an investment, a lifestyle asset, and a complete tax planning tool.

3.7 Trusts: Complexity Is the Point

Discretionary trusts let wealthy families hold assets outside any individual’s estate, pay income to family members on lower tax rates, and build up gains inside the trust. Their complexity is how they work. Structures that take specialist advisers years to build cannot be audited efficiently by HMRC, which is chronically understaffed in this area for the scale of what it oversees.

Offshore trusts go further. Until April 2025, assets placed in non-UK trusts by people not domiciled in the UK were wholly outside UK IHT. Reform of the non-dom regime has closed some of this for new trusts, but decades of existing structures remain.

3.8 Borrowing Against Assets

Sell an asset and you realise a gain and pay CGT. Borrow against it instead, using shares, property or art as security, and you get cash without any taxable event. The loan can fund a lifestyle, be invested tax-efficiently, or be given away. It is repaid from the estate on death, reducing the estate that IHT applies to. The gain is never realised and never taxed.

This is how the wealthiest people can be cash-rich and tax-free at the same time. It is not avoidance in the technical sense. It is the logical result of a system that taxes sales rather than wealth: as long as the asset is not sold, there is nothing to tax.

3.9 Loss Harvesting

Capital losses can be set against capital gains in the same year or any later year, with no time limit. Investors with large portfolios deliberately sell underperforming holdings to realise losses that offset gains elsewhere, bringing the net CGT bill down to whatever their adviser targets. The underlying wealth does not change; only the tax position does. At scale this runs all year round and works very well.

3.10 Family Investment Companies and Income Splitting

Wealthy families set up Family Investment Companies: holding companies that own assets, run by the parents, with shares held by adult children on lower tax rates. Income and gains build up in the company at corporation tax rates and are then drawn out by family members at their own marginal rates. A family that would otherwise pay 45% income tax can cut its overall rate to 20–25% through income splitting and company structuring. The arrangement is legal and widely used.

3.11 Offshore Bonds

Offshore bonds let investment returns build up untaxed inside the wrapper, with tax due only when the bond is cashed in. Holders can withdraw 5% of the original capital each year, tax-deferred, for up to 20 years, and the bonds can be written in trust for estate planning. A wealthy person can draw income from an offshore bond for decades, put off the tax bill, and time the final encashment for a low-income year or for death, when much of the liability can fall away.

3.12 Conditional Exemption for Country Estates

Conditional exemption from IHT is available for buildings of outstanding historic or architectural interest, land of outstanding scenic interest, and land of outstanding scientific interest, in return for undertakings to preserve the property and allow reasonable public access. In practice, reasonable access usually means opening for 28 days a year. A multi-generational estate passes free of IHT on condition that the public can visit on selected summer days.

3.13 Non-Dom Abolition: The Biggest Recent Reform, and What It Changed

The 200-year-old non-domicile regime was abolished from 6 April 2025 and replaced with a residence-based system. Under the old rules, UK residents whose permanent home was legally overseas could use the "remittance basis" to keep foreign income and gains out of UK tax unless they brought the money into the UK, and could shelter non-UK assets from IHT through offshore trusts. Since April 2025, all UK tax residents are taxed on worldwide income and gains as they arise, with a four-year exemption for new arrivals and a three-year facility letting former non-doms bring pre-2025 foreign income into the UK at a reduced rate.

In the regime’s final year, 73,400 people still claimed non-dom status, barely changed (down 0.5%) on the year before, and they paid £13.6bn in tax, up 9%.¹⁶ That figure answers the standard objection to closing any tax advantage: the population did not flee, and the tax collected from them rose as the old shelter closed. This pillar makes the same point about the wealth-exodus argument throughout: the threat of flight is used to defend a relief far more often than flight happens once the relief goes.

3.14 Corporation Tax: The Same Playbook for Companies

Everything described above for individuals (reclassification, reliefs that grow with size and sophistication, a headline rate that means less than it seems) has a corporate equivalent, and a large one. Corporation tax raised £95.8bn in 2025/26, the UK’s fourth-largest tax.¹⁷ Just 6,000 companies, 0.4% of all UK companies with a tax liability, paid 60% of all corporation tax, £44.7bn, in 2022/23.¹⁷ With that much concentration, how a few very large companies arrange their affairs moves the national total far more than any number of small firms could.

HMRC’s own tax gap figures complicate the popular picture of who the problem is. The total UK tax gap for 2024/25 was £59.2bn. The corporation tax gap was £21.0bn of that, 35% of the total and the largest single tax.¹⁸ Small businesses account for £17.3bn of the £21.0bn, meaning only about 55% of the corporation tax owed by small businesses is collected. Large businesses account for a much smaller share of the total tax gap across all taxes, and HMRC’s work on them is unusually productive: it recovers £95 for every £1 spent on large-business compliance staff, about four times its average return across all taxpayers.¹⁸ On the official, audited measure of who fails to pay what they legally owe, small businesses are a bigger problem than large corporations.

Starbucks remains the clearest example, and the pattern has, if anything, sharpened since the well-known 2012 case. In the year to September 2024, Starbucks’ UK retail arm paid no corporation tax and reported a £35m loss, after paying £40m in royalty and licence fees to its parent company. In the year to September 2025, its UK sales grew 6% and it opened 92 new stores, yet it reported a £41.3m loss (again after £41.3m in royalties to the parent) and received a £13.7m tax credit instead of paying anything.¹⁹ A company can grow its UK sales and store count at the same time as showing HMRC a loss, because the result depends on where the group chooses to book its profit, not on how the business is doing.

Banking has its own annual HMRC statistical release because of its political prominence since 2008, and it shows the same gap between industry claims and what companies pay from their own profits. UK Finance, the industry’s trade body, puts banks’ "total tax contribution" at £43.3bn. HMRC’s official statistics show a smaller and more revealing number: £35.2bn in PAYE, corporation tax, bank levy and bank surcharge from the sector in 2024/25, of which £24.1bn (68%) is income tax and employee NI deducted from bank staff’s pay, not tax on the banks’ own profits.²⁰ Take that out and UK banks paid £8.8bn in corporation tax in 2024/25, down 6% on the year, which HMRC attributes to lower profits. Every industry "contributes" tax through its employees’ PAYE; adding it to a sector’s own tax figure is a standard way to make the number look bigger than what the business itself pays.

The international response to profit-shifting, the OECD’s Pillar Two agreement setting a 15% global minimum corporate tax rate for large multinationals, which the UK has legislated for, is already weaker than intended. A US-negotiated side agreement exempts US-headquartered companies from Pillar Two, a significant carve-out given how much large multinational activity in the UK is US-owned. HMRC estimates the carve-out cuts the UK’s expected Pillar Two revenue from about £2.2bn a year to £1.6bn, a reduction of around a quarter in the policy designed to close this gap, before it is even fully in force.²¹

The UK is not a low-tax country overall. Its tax-to-GDP ratio of 34.4% in 2024 is close to the OECD average of 34.2%²², and the tax burden is at its highest sustained level in decades. The problem is the design of the system, not its size.

Among Europe’s five largest economies, the UK has the lowest tax-to-GDP ratio, below France (43.5%), Italy (42.8%), Germany (38.0%) and Spain (36.7%).²² The gap comes almost entirely from one source: social security contributions. UK National Insurance and other social contributions raised 6.1% of GDP in 2024, against an EU-14 average of 10.9% and 14.9% in Germany. Leave social contributions out and the UK raises more from all its other taxes combined (28% of GDP) than either the OECD or G7 average (about 25–26%).²² The UK is better described as a low-social-contribution country than a low-tax one. It makes up the difference elsewhere, including through higher income tax on earnings and years of frozen thresholds.

The UK also raises more from property taxes, as a share of GDP, than any other OECD country.²² But it does so through council tax and stamp duty, both regressive and inefficient, not through any sensible tax on property wealth. So the UK manages to be the heaviest property taxer and among the least effective at taxing property wealth. That is no coincidence in a political system where the people who own the most property have the most influence over how it is taxed.

4. The Deeper Problem: Taxing a Shrinking Base

Beyond avoidance, the UK tax system faces a problem that closing loopholes cannot fix. It depends overwhelmingly on taxing earnings from work, just as those earnings come under threat.

Income tax and National Insurance together raised £475 billion in 2024/25, over 55% of total receipts. That revenue depends on people earning wages and salaries. AI’s main effect may not be to destroy jobs but to shift the returns from work to the owners of capital. Earlier technological revolutions displaced particular jobs but shared productivity gains partly through higher wages. AI threatens to break that link: whoever owns the AI captures the gain, and the person whose role it replaces loses their income.

So the income tax base is being squeezed from two directions. AI may shrink the amount of taxable earnings. Meanwhile, people with enough capital reclassify their returns from income into capital gains, where the tax treatment is much lighter. The base shrinks from below and is gamed from above.

Meanwhile, UK household wealth stands at £10.8 trillion and keeps rising. Across all the mechanisms in this pillar, it is taxed at a small fraction of the rates applied to earnings from work.

5. National Insurance: The Tax That Hides What It Costs

National Insurance is the UK government’s second-largest source of revenue, forecast to raise £205.4 billion in 2025-26, or 16.7% of all receipts. It is also the tax whose design does most to hide what the system costs, who pays, and what it is for.

The case for merging National Insurance into income tax is mainly about transparency, more than simplicity, and it links directly to the misunderstanding of the state pension discussed below.

5.1 The Hidden Combined Rate

Public debate about income tax focuses on the headline rates of 20%, 40% and 45%. Those figures appear in every Budget, every election campaign and every argument about the tax burden. They are also misleading, because they leave out employee National Insurance, which adds 8 percentage points at the basic rate and 2 points above the upper earnings limit.

The marginal rates employees actually face, including NI, are:

5.2 Employer NI: The Tax That Doesn’t Appear on Your Payslip

Employer NI is the least visible tax in the UK system. Since April 2025 it has been charged at 15% of each employee’s earnings above £5,000 a year. It is paid by employers, not employees, and does not appear on a payslip. Most employees have no idea it exists or that it is being paid on their behalf.

The OBR assumes that from 2026-27, 76% of the cost of the 2024 Budget’s employer NI rise is passed to workers through lower real wages.²³ When the rise was announced, the Chancellor said working people would not see higher taxes in their payslips. That was accurate, because employer NI is not on payslips, and economically misleading. The tax falls on the cost of hiring. When hiring costs rise, wages grow more slowly or jobs are lost, and workers bear most of the cost without seeing it.

5.3 The Contributory Fiction: What NI Actually Funds

National Insurance was designed in 1948 as a real insurance scheme: you paid into a fund and drew on it when you needed to. The name reflects that origin. The reality is now completely different.

In the IFS’s assessment, the link between NI contributions and benefit entitlement is now "vanishingly weak". NI receipts go into general government revenue, and there is no separate fund. Entitlement to the state pension, contributory JSA and other NI-linked benefits depends on the number of qualifying years on your NI record, but the money paid in those years funded that year’s spending, not a personal pot for the future.

The contributory idea survives because it is politically useful. As the State Pension Explained companion document (S1_08) shows, the belief that NI contributions create a personal entitlement is the main political defence of the state pension against reform. An "entitlement you paid for" is much harder to change than a "transfer you receive", and the NI name does that work. Merging NI into income tax would remove the fiction and force a frank public conversation about what the state pension is.

5.4 The Self-Employed and Platform Workers

Employees pay 8% NI on earnings between £12,570 and £50,270, and their employer pays 15% on top. The self-employed pay a lower rate, 6%, on equivalent profits. Platform workers are often wrongly classed as self-employed, so the platforms avoid employer NI and the workers pay less employee NI, or none.

The result is a built-in fiscal incentive to move work out of employment and into self-employment or platform work. Each such move cuts NI receipts without cutting the worker’s entitlement to public services. The system’s own design is eroding its revenue base.

5.5 The Generational Gap Inside NI

Two features of NI already favour older workers: pension income is not subject to NI, and NI stops entirely for anyone working past State Pension age, however much they earn. A second, larger feature sits on top of these, and it affects only people who went to university since 1998.

Student loan repayment is a flat 9% deduction on income above a threshold, charged on top of income tax and NI, not instead of them.²⁴ A graduate on £40,000 faces a combined marginal rate of 37% on the next pound earned (20% income tax, 8% NI, 9% student loan), against 28% for a non-graduate colleague on the same salary. A pensioner receiving the same amount as a private pension, with no NI to pay, faces just 20%.²⁴ Three people with identical incomes face a 17-point spread in their marginal tax rate, driven entirely by age-linked features of the system rather than anything about their income or wealth.

5.6 The Case for Merger

The IFS has argued for years that there is a strong case for a single tax on income. Keeping two separate taxes brings little benefit, makes their combined effect harder to see, adds administrative burden, creates anomalies between annual income tax assessment and NI assessed each pay period, and, most importantly, lets politicians raise one while claiming not to raise the other.

The complications are real but manageable:

Pensioners. Pensioners pay income tax but not employee NI. A merger would force a choice: either pensioners start paying the combined rate (politically explosive, and regressive for poorer pensioners), or pension income is taxed at a lower rate matching its current position. The IFS notes that this would be an improvement, because today’s in-between treatment of pension income is "an accidental by-product of decisions made for other reasons", not a principled design. Making it explicit and deliberate would be better than leaving it to accident.

Scotland’s devolved income tax. Scotland controls income tax but not NI, so a merger would raise a constitutional question. It can be solved, but only through negotiation with the Scottish Government before any merger goes ahead.

Presentation. A merger means either showing the combined rate openly (raising the stated income tax rate to include NI) or keeping the stated rate and abolishing NI as a separate charge (which would look like a huge tax cut). Explaining either is a serious political challenge. Jeremy Hunt’s 2024 ambition to "abolish NI" was essentially a rebranding: the revenue would still have to be raised, just under the income tax label.

6. Counter-Arguments and Responses

‘The wealthy pay the majority of income tax. They are already contributing’

They pay a large share of income tax because they receive a large share of income. The question that matters is the effective rate they pay, not their share of the total. A billionaire who pays £10 million in tax on £100 million of economic gain is paying 10%. An employee on £60,000 pays closer to 30% of each extra pound, including NI. Absolute sums are not the measure of fairness.

‘Tax reliefs serve legitimate purposes: EIS funds businesses, art reliefs preserve culture’

Many reliefs began with sound policy aims. The problem is that they are exploited on a scale their designers never intended, and that in practice only people with capital can benefit. A relief open to all in theory but usable only by those with capital to deploy at scale is a subsidy for accumulating wealth, presented as public policy. The cultural case for Acceptance in Lieu is real. So is the fact that it lets estates settle IHT on better-than-market terms. Both are true.

‘Closing these mechanisms will drive wealth out of the UK’

This is the most common objection and it deserves the fullest answer, because it is at once the most emotionally powerful, the weakest on evidence, and the most tactically used argument in the tax debate. It works as a veto on reform: propose anything meaningful and the objection arrives within hours, citing the same figures and generating the same headlines. Making the case for change requires showing why it fails.

The main source for the "exodus" claim is an annual report by Henley & Partners, a firm that sells residency and citizenship-by-investment services to the very people it says are leaving. The report is prepared by New World Wealth, which the Tax Justice Network says appeared, when it last checked, to have one employee. According to the Tax Justice Network’s review, the report uses no statistical controls, relies on self-selected surveys, and has changed its definition of "millionaire" between years while presenting the figures as a consistent series. The same review found that the migrating millionaires Henley identifies each year consistently make up less than 0.2% of the world’s millionaires, a rate slightly lower than in 2016, 2017 and 2018, which contradicts Henley’s own "unprecedented" framing. The 16,500 figure cited for the UK in 2025 is about 0.55% of the UK’s three million millionaires. The Tax Justice Network also notes that Henley called 2,000 millionaires leaving the UK in 2021 "insignificant", and 1,600 leaving in 2023 an "exodus". The word doing that work is marketing, not evidence.

The media coverage the report generates is itself revealing. The Tax Justice Network found more than 10,900 news articles citing Henley’s figures in 2024 alone, around 30 a day, although the exodus was not happening. Seven named millionaires reportedly thinking of leaving the UK were mentioned nearly three times as often as groups representing over 300 millionaires campaigning to pay more tax. The argument does not survive scrutiny; it survives through repetition.

The views of wealthy people themselves undermine it further. A June 2025 poll by Patriotic Millionaires UK found that 81% of UK millionaires agree it is patriotic to pay a fair share of tax, 80% support a 2% wealth tax on wealth over £10 million, and 76% support higher taxes on their own wealth if it means a more stable and equal society for future generations. Nearly 60% think it is unpatriotic to leave the country when asked to contribute more. These are not people on the point of leaving. They built their wealth in the UK, their businesses depend on UK infrastructure, education, courts and customers, and they understand that the public goods behind their success have to be paid for.

The flight argument also concedes something important. If the only way to keep wealthy residents is to let them pay a lower effective rate than middle earners, the argument is not that reform is wrong but that the wealthy are beyond democratic accountability. That is a statement about power, not tax policy. The Generational Reset rejects the idea that any group should be exempt from the obligations of citizenship because it can afford to leave. A patriot invests in the country that made them. Someone who threatens to leave when asked to contribute is telling you something about their relationship with Britain, and that relationship should not set public policy.

But the real answer to capital flight is practical, not moral, and the tool already exists in another country.

The United States introduced an exit tax through the HEART Act of 2008 (Internal Revenue Code section 877A), designed to stop wealthy people renouncing citizenship to escape US tax. It works as a deemed sale: the IRS treats all worldwide assets as if sold at market value the day before departure, charging capital gains tax on every unrealised gain built up while the person was a US taxpayer.²⁶ You can leave, but you cannot take untaxed wealth with you.

The Generational Reset proposes the same mechanism for the UK, set at the same rate as the inheritance tax on death. The logic is direct: if the state’s claim on wealth built up under the British system is settled at 95% on death, it should be settled at 95% on departure. Dying and leaving are both treated as the moment of final settlement with the society that made the wealth possible. One refinement is needed for this to work. The trigger must be ceasing to be UK tax resident, not renouncing British citizenship. The US uses citizenship because that is the basis US tax law uses everywhere; for the UK, residence is the boundary that matters, and it is the avoidance route that Wealth Tax or Inheritance Tax? identifies. The Economic Renewal pillar sets out the international precedent for a residence-triggered version in full: France, Norway, and the UK’s own considered-but-shelved 2025 Budget proposal all use this trigger.

The symmetry is more than a rhetorical device. It closes the one real gap in the inheritance tax design: the person who builds wealth in the UK over a lifetime, emigrates at 80, and dies abroad without ever settling with the society that made their fortune. Together, inheritance tax on death and exit tax on departure, both at 95% on wealth never previously taxed, make the system comprehensive and very hard to avoid.

Two design requirements follow. The first is liquidity: a 95% deemed sale of illiquid assets such as a family business, a farm or a private company stake cannot be paid in cash without forcing a real sale. The standard answer is to defer payment on illiquid assets, with interest charged and a charge registered against the asset; the US exit tax uses this and it works. The second is scope: the exit tax should apply only to gains built up during UK residence, not to wealth made elsewhere. Someone who built a fortune in Germany and lived in the UK for ten years should be taxed on ten years of UK gains, not their whole estate. Apportioning by period of residence solves this. Both are design details, not arguments against the principle.

What the exit tax removes for good is the threat of flight as a veto on reform. Once leaving triggers the same settlement as death, the financial reason to leave disappears. Emigrating for the lifestyle stays entirely free; go and live in Monaco if you prefer the weather. Emigrating to avoid tax stops making financial sense. The threat that has hung over every serious wealth tax proposal in British history loses its force once the design makes it empty.

‘The wealthy create jobs. Taxing them damages the economy’

This argument mixes up three different things: entrepreneurship, the accumulation of wealth, and the holding of family fortunes across generations. They are not the same, and each needs different tax treatment.

Entrepreneurship, meaning starting a business, taking risks and building something new, does create jobs. The Generational Reset does not dispute this; it celebrates it. The economic pillar is designed to maximise the incentive to earn, build and create during a lifetime. Cutting income tax means an entrepreneur keeps more of every pound they earn, so the incentive to build goes up, not down. What ends is the ability to pass the whole accumulated result to descendants who took none of the risk and did none of the work. The reward for enterprise is kept in full; turning it into a dynasty is what stops.

The second problem is the claim about job creation itself. Jobs are created by demand, not by the existence of wealthy people. A business hires when customers want what it sells, not because its owner is rich. Consumers with money to spend create the demand that creates jobs. A tax system that concentrates wealth at the top while squeezing wages and public services everywhere else reduces the consumer demand that actually drives employment. Trickle-down economics, the idea that wealth concentrated at the top automatically benefits those below, has been tested empirically for decades without producing convincing evidence that it works as described. What the evidence does show is that lower earners spend more of any extra income than the wealthy do, so shifting resources toward the middle and bottom generates more economic activity per pound than accumulation at the top.

Third, and most important for this pillar: the wealth an inheritance tax would capture is mostly not entrepreneurial capital creating jobs. It is accumulated, often inherited, wealth held in property, financial assets, art, trusts and offshore structures. The private equity fund whose carried interest was taxed as capital gains for decades was not creating jobs; it was restructuring the ownership of existing businesses, loading them with debt and taking fees. The estate passing through Agricultural Property Relief is not a major employer; it is land held in a family structure across generations. An AIM portfolio built to remove IHT is not venture capital funding innovation; it is listed shares repackaged as an inheritance tax product. The job creation argument applies to the entrepreneur at the start of the process, not to the dynasty at the end of it.

The strongest version of the jobs argument is the concern about family businesses: the manufacturer, the farm, or the regional employer that might have to be broken up to pay a large IHT bill. This is a real issue and needs a real answer. The economic pillar’s spend-down incentives and directed investment vehicles are designed for it: owners who want to keep and grow their businesses have every reason to do so during their lifetime, and every reason to invest in structures that keep the business running. The answer to the family business problem is not a blanket exemption that swallows the whole inheritance tax. It is a design that protects productive businesses while capturing the passive wealth the exemption argument was never really about.

‘HMRC is already closing the gaps. The system corrects itself’

HMRC does recover large sums from wealthy taxpayers and avoidance schemes, but mostly through investigations and litigation that take years. A system that needs forensic investigations lasting years to recover tax that was always owed is under-enforced, not self-correcting.

‘Even if reform passes, the wealthy will capture how it is implemented and erode the effective rate over time. Sweden abolished its inheritance tax entirely in 2004’

This is the most sophisticated objection to the economic reform this pillar supports, and it deserves a serious answer. The Swedish case is real, and worse for reformers than the usual telling suggests. Sweden’s inheritance tax had a top rate of 70% on the largest estates from the late 1950s.²⁷ It was hollowed out in two ways. Valuation reliefs for family firms, introduced from the 1970s, cut the effective rate on the largest fortunes while middle-class heirs still faced high rates, which undermined the tax’s legitimacy. Then a parliamentary majority cut the top rate from 70% to 30% in 1992. Bequests to spouses were exempted in 2003, and the tax was abolished entirely in 2004.²⁷

The way implementation gets captured is well understood. The political battle is won when the law is passed. The wealthy then use their resources at the implementation stage: capturing the bodies responsible for valuation, litigating to set precedents that erode the effective rate, lobbying for wider reliefs in later Finance Acts, and slowly filling HMRC’s wealthy individuals unit with people who move back and forth from the private client firms advising the estates being assessed. At a 95% IHT rate, the reward for capturing implementation is larger than for almost any tax in history: every pound sheltered saves 95 pence.

The Generational Reset takes this risk seriously, as one of the biggest design challenges the economic reform faces. The Economic Reform pillar’s detailed design work proposes four responses. First, constitutional or near-constitutional protection of the rate, requiring a supermajority to change it, so a simple parliamentary majority cannot quietly cut it. Second, ongoing transparency: publishing inheritance tax receipts and effective rates in real time, so any gap between the legal and effective rates is visible and politically costly. Third, independent valuation, with no financial relationship between valuers and the estates being assessed, modelled on the planning inquiry process. Fourth, public organising online that creates the same focused pressure wealthy interests now apply through private lobbying. The cost of mobilising scattered public interests has fallen enormously since Sweden’s debates of the 1980s, and a movement that can publish real-time avoidance data changes the politics of implementation.

Sweden’s abolition is a warning, not proof that reform is impossible. Every major progressive tax reform has faced pressure during implementation. Income tax was introduced in 1799 at a top rate of two shillings in the pound (10%) to pay for the Napoleonic Wars, and was meant to be temporary. The wealthy will try to capture implementation; the design has to expect that from the start. The real question is whether the institutions are strong enough to make capture visible, costly and difficult. The Generational Reset proposes designing the system around that specific weakness instead of pretending it does not exist.

7. Proposals for Change

These proposals are the core of this pillar, put forward for public examination and challenge. Each sets out a concrete action, not a general direction.

• P1 Publish a full analysis of effective tax rates for the top 1%, 0.1% and 0.01% of wealth holders: not just income tax paid, but effective rates across all taxes and all reliefs claimed. Transparency comes before reform.

• Apply substance-over-form principles to art and collectibles held in foreign freeports by UK-resident beneficial owners, treating them as UK assets for all tax purposes.

• Close the AIM IHT shelter. Business Property Relief should apply to trading businesses with real employment and productive activity, not to portfolios of listed shares bought to avoid inheritance tax. The 2026 cut to 50% relief narrows the shelter but leaves it open.

• P4 Require HMRC to publish an annual Tax Avoidance Landscape report naming the reliefs most used for avoidance, how much tax they reduce, and the proposed legislative response for each.

• Commission independent actuarial modelling of effective tax rates on inherited and earned wealth across the whole distribution: not headline rates, but what is actually paid after all reliefs, structures and mechanisms.

• P5 Resource HMRC’s wealthy individuals unit to audit the complexity it faces. Structures that take years to build and that HMRC cannot investigate efficiently are a failure of enforcement, not an unavoidable feature of the law.

• As the economic pillar proposes: a 95% inheritance tax on all wealth at death, applying universally with no exemptions by asset class, paying for a substantial income tax cut. This pillar’s diagnosis is the argument for that reform: the current system cannot be fixed at the margins, because every margin is already being exploited.

The tax system is not failing by accident. It works exactly as designed, for the people who designed it. The Generational Reset proposes designing it for everyone else.

This document is the diagnostic companion to the Economic Reform pillar of the Generational Reset, which sets out the proposed response: a 95% inheritance tax on all wealth at death, paying for a substantial income tax cut. Read it alongside How Tax Actually Works, which explains what tax is, how it operates, and what low-tax countries are actually doing. The three documents stand alone but together make one argument: foundation, diagnosis, prescription.

The Generational Reset is a non-partisan, public-interest project. It is not affiliated with any political party, does not accept corporate funding, and publishes all its work under open licence for public discussion and adaptation.

The Generational Reset | S3_02: Tax Avoidance | For public discussion. Not affiliated with any political party. | generationalreset.org