Doom Loops, Debt Spirals and Dumb Taxes Part II
How Non-Dom taxes, inheritance taxes and employment taxes are undermining the UK economy.
A doom loop occurs when government policy reduces economic activity by over-taxing it, over-regulating it, or allowing unconnected third parties to stifle it with litigation. Lower economic activity lowers tax revenue, which in turn causes a debt spiral if the government can’t or won’t cut spending, which leads to increased debt and higher debt costs. In the 2024/25 financial year, the UK public sector net debt was £2.8 trillion, equivalent to 95.1% of GDP. Public sector net borrowing was £151.9 billion in 2024/25, £20.7 billion higher than the previous year and equal to 5.3% of GDP, up from 4.8% in the financial year 2023/24.
To make up for this shortfall in revenue, the government has increased taxes on employment, inheritance tax on farms and family businesses, and taxes on non-doms. But instead of increasing tax revenues, the new taxes are lowering full-time employment, discouraging investment and scaring away high net worth individuals.
It is too late to Tax the Rich
Some members of parliament believe that the UK should introduce a wealth tax to ‘tax the rich’ to get out of its debt spiral. But they are too late, we already tax the rich, and they pay much more towards the exchequer than they receive in benefits. Most of them will take no benefits, even ones they are entitled to. Instead, the rich opt to use private schools and hospitals; they own their own homes, pay road taxes and air passenger duties, and contribute to a private pension even though they pay the bulk of UK tax revenues.
Let's start with income tax. According to HMRC’s breakdown of income tax distribution up to the 2024/25 tax year, the top 10% of the UK taxpayers pay almost 60% of all income tax. The top 5% pay nearly half of all income tax at 47.4%, and the top 1% pays over a quarter, at 26.6%. The graph below makes it very clear that we seriously need ‘The Rich’ to pay for government spending.
And this is just income tax. This does not include any of the UK’s wealth taxes or VAT. Yes, some MPs will be surprised to know that the UK already has wealth taxes: Inheritance Tax, Stamp Duty on share purchases, Stamp Duty Land Tax on property purchases, Dividend tax and Capital Gains Tax are all charged on wealth.
The tax revenue raised from these wealth taxes is not published by percentile but by the value of the property, estate or investment. However, HMRC estimates that the wealthiest 1% pay at least 40% of all capital gain taxes. In the 2021/22 tax year 45% of capital gains tax was paid by fewer than 4,000 individuals. (There are 316,000 people in any one percentile of UK taxpayers). According to HMRC, residential properties worth more than £1 million raised 52% of total Stamp Duty Land Tax receipts, even though they account for only 4% of all transactions. And the wealthiest 11% of deceased estates in the UK pay 51% of all inheritance tax, while the wealthiest 0.6% of estates pay 11% of all inheritance tax. So we are definitely ‘taxing the Rich’.
What about a Wealth tax?
Incredibly, various members of the government are calling for an additional wealth tax despite ample data showing that increasing taxes on wealth; lowers economic activity, discourages investment, and drives high-net-worth individuals out of the country. Most of the other countries that have tried to introduce a wealth tax have abandoned it because: it was too difficult and expensive to value assets (Germany); it caused capital flight (France); administrative difficulty, low revenue and discouraged investment (Sweden); limited revenue and high compliance costs (Denmark); too complex and inefficient (Finland); low revenue and high administrative burden (Austria); I could go on but I imagine you get the idea.
The best taxes from a government point of view are those that are easy and cheap to collect and generate significant revenue. Most obviously, PAYE Income Tax & National Insurance, and VAT, which are collected by businesses and sent directly to HMRC. They raise 30%, 20% and 20% of all UK tax revenue. Corporate tax is also relatively easy to collect, and raises another 11%. Together, these taxes make up over 80% of UK tax revenue, but they also require companies to stay in business and keep employing people in order to collect the taxes to send to HMRC. I will come back to this point again and again.
Non-Domiciled resident taxpayers
Wealth taxes also cause people to change their behaviour or their living arrangements. For example, Non-domiciled residents are leaving the UK due to the abolition of the UK’s non-dom regime. Before the 2025/26 tax year, non-doms were only taxed on their UK income and any foreign income remitted to the UK, plus a remittance charge. Since April 2025, domicile status for tax purposes has been abolished, and all UK residents will be taxed on their worldwide income and gains as they arise. Their wealth held in other jurisdictions will also now be subject to the UK’s exceptionally high inheritance taxes of 40% on assets worth more than £325,000.
On Thursday, the Financial Times (FT) rejoiced that the number of non-Doms leaving the country was in line with expectations, rather than higher than expected. So what were the ‘expectations’ for departures? Rather incredibly, the government changed the tax rules for Non-Domiciled residents of the UK with the expectation that 25% would leave the country if they held their assets in a trust and that 10% would leave if their assets were not held in a trust. From PAYE data, which only shows non-Doms that were employed in the UK, these expected leaving rates appear to be correct. However, non-doms that ran companies in the UK or lived on their remitted income from foreign assets may have also left, but this won’t be obvious in the data until January 2026. According to the FT, Companies House filings indicate that 3,790 directors have left the UK between November 2024 and July 2025. However, it is worth noting that some of these individuals may have been high-net-worth UK citizens rather than non-Doms. Although that is also not something to be happy about.
According to CW Economics’ analysis, if 25% or more of UK non-Doms leave the country, the tax reforms would reduce revenues, not increase them. So it is surprising that the FT report is so bullish. If CW is correct and we would lose revenue if more than 25% of non-doms leave the country, then we can’t be taking in any additional revenue if exactly 25% have left, which would appear to be the case.
Non-doms contributed £12 billion in tax and national insurance in the 2024 tax year, of which £7 billion came from remittance-based taxes alone. This implies they are remitting over £15 billion into the UK economy. HMRC expects the non-dom reforms to raise another £2 billion over five years. Risking £12 billion to gain a further £2 billion over 5 years seems like an extraordinary gamble. Even the usually overly optimistic OBR has assigned a ‘very high uncertainty rating’ to its revenue forecasts from the non-dom reforms.
According to the FT, the UK chancellor, Rachel Reeves, may reverse the inheritance taxes on non-dom offshore assets (which will be almost impossible to find, assess or tax), but ‘will wait for the full year data before deciding whether to do so.’ This will be too late. Once non-Doms have gone to the expense of moving their homes and their businesses out of the UK, they are unlikely to move back. If the tax changes do indeed reduce the revenue from non-Doms, this will prove to be a very DUMB tax.
Doom Loop Two.
Just as dumb as the idea of attempting to apply inheritance tax to assets held offshore by non-domiciled UK residents, the government is also planning to charge inheritance tax to family farms and family businesses. Inheritance tax only raised £8.25 billion in 2024-25. This is less than 1% of the total tax revenues, and unlike PAYE, NI and VAT, it is expensive and time-consuming to value and collect. However, expanding the tax base to include farms and businesses will likely lead to the breakup of those farms and businesses. So, a short-term tax gain could end up destroying businesses, lowering economic activity, employment, and, in turn, tax revenue. As mentioned above, the high revenue and easily collected taxes (PAYE, NI and VAT) necessitate that businesses remain in operation; forcing them to sell their means of production to pay inheritance tax would create another Doom Loop for the economy.
Under the new plan, family farms worth more than £1 million will be subject to inheritance tax, even if passed within the family. This will force families to sell land – the main asset of a farming business – in order to pay the tax. It has already caused 49% of farms to cancel investment projects and 23% to pause recruitment or cut jobs, according to the Country Land and Business Association. Even if the landowner employs tenant farmers, those tenant farmers’ businesses are based on using a certain amount of land. If part of the land they rent is sold, they will also have trouble keeping their businesses solvent.
Other types of family businesses could also be forced to sell their assets to pay inheritance taxes on their business assets above £1 million. Businesses that own their premises, such as retail, hospitality and manufacturing, will be particularly vulnerable to forced sales to pay inheritance tax. This would also result in job losses and reduced economic activity.
There are over 5 million small and medium-sized businesses in the UK, and they are responsible for 60% of UK private sector employment, about 16.6 million people. They are also responsible for about half of the UK GVA (Gross Value Added). Research by Family Business UK and CBI Economics predicts job losses as high as 208,000, a £14.9 billion reduction in GVA and a £1.87 billion net fiscal loss to the government due to reduced investments and restructuring caused by the changes to the Inheritance tax regulations. As mentioned above, risking the big easy to collect taxes (PAYE, NI and VAT) in the hope of raising slightly more when a business owner dies, in a world where life expectancy is constantly increasing, seems like an extraordinary gamble.
Doom Loop Three
It is well known that 80% of the UK economy is services, and it's less well known that 58% of UK exports are also services. Service industries don’t require a lot of plant and equipment, unlike oil and gas projects, oil refineries, or chemical factories being hit by EPL (see Doom loop 1), nor do services industries require land and property like farms, restaurants and manufacturers (Doom Loop 2, above), but service industries do require lots of employees to provide the service. This is why adding employment regulations and taxes that increase the cost of employing service industry staff may raise more revenue in the short term, but may also reduce total employment, working hours and economic activity.
When Sunak was Chancellor, he increased National Insurance (NI), adding an additional 1.25% to the employer rate, the basic employee rate and the upper employee rate, but increased the employee NI threshold to £12,570. The Truss/Kwarteng government repealed the NI increase. The following chancellor, Hunt, repealed the repeal for employers' NI, returning it to 15.05%, but kept the repealed main rate of employee national insurance. Hunt later reduced employee NI to 10% and then to 8% and returned Employers' NI back to 13.8%.
Not to be outdone, Rachael Reeves lowered the salary threshold for employers' NI to just £5000 and increased the rate back to 15%. This change began in the 2025/26 tax year. She expected the change to raise £25 billion annually by 2029/30, and so far, with May and June tax data, that looks likely; Employer NI payments were about £2 billion higher in both May and June 2025 than in 2024. However, the ONS Vacancy Survey feedback suggests some firms may not be recruiting new workers or replacing workers who have left: job vacancies fell by 42,000, and the unemployment rate for April-June 2025 is now 4.7% up from 4.2% in April-June 2024.
This was not just because of the increase in NI but also due to an above-inflation increase in the National Living Wage of 6.7%, a 16.3% increase in the minimum wage for 18-20 year olds, and an 18% increase in the minimum wage for 16 to 17 year olds and apprentices. In addition, the Employee Rights Bill should receive Royal Assent in the late Autumn 2025, it will repeal the Strikes (Minimum Services Level) Act in early 2026 and from April 2026 will grant employees ‘Day 1’ rights for unfair dismissal, sick pay and paternity leave, along with many other costs or benefits, depending on whether you are the employer or the employee.
This is already having an effect on employment. The Resolution Foundation claims employers are cutting hours and shifting to zero-hour contracts. (The Act covers zero-hour contract reform, but this won’t come into effect before 2027). The HMRC PAYE Real Time Indicators (RTI) data, derived from administrative tax records, supports the Resolution Foundation's findings. The Labour Force Survey employee index has increased from 105 in June to August 2024 to 106.2 in April to June 2025, but the PAYE RTI employee index has fallen from 104.9 to 104.5 over the same period. More employees but fewer PAYE employees.
But it gets worse. The quarterly UK Labour Force Survey to Jun 2025 shows public sector jobs have increased by 133,000 since the first quarter of 2025, while private sector jobs have only increased by 48,000, a sign that only the government can afford the new employment costs because they are using other people’s money, and they don’t have to make a profit. Viewed over a year, things are more worrying: employment in Britain's most lucrative employment sector, Financial and insurance activity, was down 104,000, and manufacturing employment was down 48,000. In contrast, public administration, defence, and social security employment is up by 312,000.
How is this affecting tax revenues? Inflation to the rescue!
Fixed tax rate thresholds have allowed HMRC to claw back a proportion of the wage rises in taxes, through fiscal drag. So, an additional £1 billion was collected from Income taxes in both May and June 2025, compared to May and June 2024, even though the headline income tax rates haven’t changed.
Although the latest wage data shows nominal regular pay (excluding bonuses) has increased by 5%, after inflation is taken into consideration, the increase is only 0.9%, using the Consumer Price Index including imputed rent and council tax (CPIH). However, many people who received these wage increases may have found that they are now in a higher tax bracket, or they have started to lose their child benefits, child minder tax credits or tax-free allowances, even though the deflated wage increase is worth very little.
Tax thresholds were once adjusted to account for inflation, albeit not perfectly, but at least enough to discourage the moral hazard of government money printing, to cause inflation and increase tax collections. However, in 2021, Chancellor Sunak froze the personal allowance and higher rate threshold until 2026 (after increasing the money supply by £400 billion) – what fortuitous timing! In 2022, Chancellor Hunt extended the threshold freeze to 2028, and now Chancellor Rachael Reeves is expected to extend it again.
In a period with relatively high inflation, freezing the tax thresholds allows Chancellors to collect more tax revenue without raising the headline tax rate. Fiscal drag is expected to raise an additional £4 billion from income taxes alone – without changing the rates.
Fiscal drag calculations:
The threshold for the Basic tax rate (20%) has been £12,570 since 2021, but if it were adjusted for CPI inflation, it would be £15,830 now.
The Higher Rate (40%) threshold has been £50,270 since 2021, but if it were adjusted for inflation, it would be just over £62,000.
The Additional Rate (45%) threshold of £125,140 has been fixed since 2010 and was lowered from £150,000 in 2023, but if the original £150,000 threshold had been adjusted for inflation, it would be £186,000 now.
While the Capital Gains Tax exemption (£12,300 in 2020/21) and the Dividend allowance (£5000 in 2016) have both been cut in nominal terms, they should be £15,252 and £6,876, respectively, had they been adjusted for inflation.
The cut in the CGT allowance to only £3,000 has increased the number of CGT taxpayers by over 50%, most of whom will have made very modest gains. In contrast, people with larger gains have probably deferred their sales, keeping money tied up in assets that could be better utilised in more productive businesses.
Similarly, the dividend allowance cut has increased the number of people paying dividend tax from about 700,000 to 1.7 million in 2024/25.
The inheritance tax threshold has been fixed since 2009 at £325,000; this would be £585,000 if it had been adjusted for CPI inflation. Instead, it has dragged many more estates into the IHT net as property and asset values have increased with inflation. And the Treasury has extended the freeze until April 2030, which the OBR estimates will raise an additional £2.5 billion in revenue.
HMRC estimates there are presently 6.7 million taxpayers paying the higher 40% rate, up from 5.2 million in 2020/21 and 4.6 million in 2015/16. The OBR estimates that the threshold freeze will drag another 3.5 million people into the high-rate tax band by 2028-29. There are currently 1.23 million people paying the additional 45% rate, up from 600,000 in 2020/21 and only 350,000 in 2015/16. And it is not just the headline tax rate: People start to lose their child benefit once they earn more than £60,000 (if this threshold had been increased in line with inflation from its £50,000 level set in 2013, it would be £78,000). People earning over £100,000 start to lose their personal tax allowance; this was fixed in 2010, but it would be £124,000 had it been increased in line with inflation, with a complete loss of the allowance only kicking in at £155,174 rather than at £125,140 as it does today. This means that every additional pound earned above £100,000 is taxed at 60%. Similarly, people lose their free childcare allowance if they earn over £100,000, a threshold set in 2017 which would also be £124,000 if it had been adjusted for inflation. And this is not a tapered reduction but a cliff-edge.
How does this lower economic activity and cause a Doom Loop?
Fixed tax rate thresholds and allowance reductions discourage people from working longer hours, which in turn keeps productivity low. Fixed tax rates and allowance reductions also discourage people from taking managerial jobs that generally involve more work and responsibility. This is especially true of parents who would also lose their tax-free childcare, as the extra work involved in a managerial role usually also necessitates more childcare rather than less.
Low tax-free thresholds on capital gains and investment income discourage the disposal of underutilised assets and reinvestment in companies that pay dividends and make capital gains, after those companies have employed people, paid PAYE, NI, VAT, and corporation taxes (those big, easily collected taxes again).
For example, in the 2022 to 2023 tax year, HMRC collected £16.9 billion in Capital Gains Tax (CGT). At the time, the individual allowance was £12,300 and the rate was 10% for basic rate taxpayers, 20% for higher rate taxpayers and 28% for additional rate taxpayers. When the allowance was cut to £6000 the following year, receipts dropped to £14.5 billion. In the subsequent tax year, 2024/25, the CGT rates were increased to 18% for basic rate taxpayers and 24% for higher rate taxpayers, and the allowance was cut to £3000; unsurprisingly, the tax collected dropped to £13 billion. £3.9 billion in lower CGT collections in 3 years!
The Chart below shows the dramatic change in the capital gain tax collected as the tax rate increased and the tax-free allowance was cut. The total allowance is the individual allowance multiplied by the number of individual CGT taxpayers. As the tax-free allowance was cut, less tax was collected, not more, even though the number of people paying CGT increased by 100,000. And when the tax rate was lowered in 2016/17, more CGT was collected. This is a classic example of the Laffer curve in action. No doubt the treasury officials proposing retaining the fixed thresholds for longer will assume this fall in revenue is just a coincidence.
Chart 2. Total CGT revenue is showing changes in allowances and tax rates.
UK taxes are creating a doom loop where employees benefit more from working less, staying in a lower tax bracket, and keeping their tax-free allowances. And investors are better off leaving their capital in sub-optimal investments. This is a doom loop for working people, active investors and profitable companies. Those on benefits can also get into a doom loop where they are better off remaining on benefits, but that will require another essay.
Conclusion
These are not smart taxes in a service economy that desperately needs to increase productivity. We need a tax policy that encourages people to work longer hours, in the highest-paying, private sector jobs they can find. We need a tax policy that encourages money to move from unproductive assets to more productive investments, which hopefully make a profit and pay dividends. We need a tax policy that enables small and medium-sized businesses to continue to operate, employ people and pay taxes. We need a tax policy that encourages the global wealthy to live in the UK and spend their money here.
Worst still, besides risking the bulk of UK taxes by discouraging businesses and driving the rich out of the country, these tax increases still aren’t enough to pay for the Government’s additional spending. Which brings us back to the opening paragraph of this essay: A doom loop occurs when government policy reduces economic activity by over-taxing it, over-regulating it, or allowing unconnected third parties to stifle it with litigation. Lower economic activity lowers tax revenue, which in turn causes a debt spiral if the government can’t or won’t cut spending, which leads to increased debt and higher debt costs. In the 2024/25 financial year, the UK public sector net debt was £2.8 trillion, equivalent to 95.1% of GDP. Public sector net borrowing was £151.9 billion in 2024/25, £20.7 billion higher than the previous year and equal to 5.3% of GDP, up from 4.8% in the financial year 2023/24.
Stay tuned for the next instalment of Doom Loops, Debt Spirals and Dumb Taxes, out later in the week.