UK’s tax system lets the wealthy off the hook, report finds – and traps Northerners in inequality

Britain’s lopsided tax system is trapping Northerners in a “wealth inequality spiral”, new research has shown.

A person in the North of England will have £210,000 less wealth than someone from South East England by 2030, according to the Institute for Public Policy Research. This staggering disparity is worsened by the “under-taxing of income from wealth”, their new report reveals, compared to heavier taxes on income from work.

Southerners are more likely to get their money from existing wealth – say, a property sale, or income from a shares portfolio – so this unequal tax system is entrenching regional inequality.

“It’s the opposite of levelling up,” said George Dibb, associate director for economic policy at IPPR. “But there are relatively easy ways to close these loopholes.”

How does tax inequality work?

A popular phrase tells that two things are certain in life: death and taxes. But if you already have a lot of assets, you can avoid the worst of the latter.

Some 60% of all private wealth in the UK is inherited, rather than accumulated through work. This wealth is taxed “very lightly”, the IPPR says.

“The vast majority of people in the UK receive their income from work, you get a salary and you pay your income tax and national insurance on that,” said Dibb.

“But that’s not how you pay your tax if you get your income from a different source. Say you want to sell a property to cash in on rising value, or you have a shares portfolio, or investment income. The wealth taxes you pay on that income is taxed at a lower rate.”

Someone making £50,000 per annum purely from capital gains – say, from selling a house and making a £50k profit – would pay around £6,000 less than someone who earned £50,000 per annum from wages alone. The highest rate of capital gains tax is 28%, as opposed to the 45% higher rate of income tax.

In short, a nurse or a teacher will pay more than someone making the same amount of money from selling property.

The tax system is one of the most “significant barriers to levelling up that we face”, said Marcus Johns, senior research fellow at IPPR North. This is because wealthy residents of wealthy cities get away with paying less tax. Chargeable capital gains per head amount to more than £2,400 in London but only £500 in Wales.

“[Under taxing income from wealth] is not just unfair, it’s a handicap on our efforts to rebalance wealth and opportunity between the regions,” Johns added. “We need to level the playing field on tax, to reflect the value we place as a society on work and productive wealth creation as opposed to wealth extraction.” 

Regional disparities are widening in Britain. The average person in the UK is £10,200 poorer than they would have been if the economy had grown at pre-2010 rates, the Centre for Cities found earlier this year. But in places like Aberdeen, residents are a mammoth £45,000 worse off.

The two-tier tax system is making things worse, Dibb explained.

“Lets pick two places – say London and Lincoln,” he said. “London has a lot more wealth accumulated in it, so if you tax income from wealth at a lower rate, London will always be ahead. Wealth confers so many tangible benefits on people.

“We know that if you are wealthier, you typically have a longer life expectancy and better quality of life. And you have economic safety net that allows you to take risks, you’re more likely to be able to go out and start a business, to become an entrepreneur.”

Research released earlier this year showed that people in the most deprived parts of the country are twice as likely to experience poor health than their wealthier neighbours. In Liverpool, the healthy life expectancy is just 58 years, compared to 70 in Berkshire.

“Unfortunately, our tax system is putting the foot on the accelerator of this kind of inequality,” Dibb said. “The new government should put its foot on the brake.”

Prime minister Keir Starmer has warned of ‘difficult decisions’ at the upcoming October budget, citing a £22bn “black hole” in public finances. Chancellor Rachel Reeves has ruled out raising income tax, national insurance, and VAT. However, she refused to rule out a raid on capital gains or increasing inheritance tax.

Equalising capital gains tax rates to income tax rates would raise £68bn by 2029/30, the IPPR claim. An overhaul to wealth taxes could provide the economic boost the new government needs.

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