# Who pays for the state?

_Last week I argued that the inequality story being used to soften us up for the next round of tax rises doesn't survive contact with the data. The natural next question is who actually pays._

Neil Woodford · 11 August 2026 · 3 min read

![Funded by UK Government ](https://cdn.sanity.io/images/v3acfbvo/production/84de9d320467dc83bdfe9b175c7034916b86dd9b-3012x4512.jpg?w=1600&fit=max&auto=format)

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Last week I argued that the inequality story being used to soften us up for the next round of tax rises doesn't survive contact with the data. It prompted some good questions from readers, and the best of them deserve a proper answer: **who actually pays?**

_Last week's piece on inequality – read this first:_ [When small men begin to cast big shadows](https://www.noisecancelling.co/read/when-small-men-begin-to-cast-big-shadows) — Rising inequality is the story being used to justify the next round of tax rises. The data tells a different one – and here it is, charted.

The UK tax system has become significantly more progressive over the last thirty years. I would argue it is too progressive. That is not a fashionable view, so it is worth showing my working.

Start with the size of the take. Tax receipts are now higher as a share of GDP than at any time since the early 1980s, at roughly 40% of everything the economy produces in a year. _(Neil in the margin: Tax-to-GDP is the standard measure of the state's size. Around 40% puts the UK near a post-war high, though still below France or the Nordics, which run well into the 40s or beyond.)_

![The tax take: highest since the early 1980s](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/hLfyiNwS5Y05kEKwvXJiw5-965591d5c9eb-light.png)

## Where the money comes from

The system has a long tail of small levies, but four taxes pay for almost everything: income tax (£330bn in 2025–26), national insurance (£206bn), VAT (£183bn) and corporation tax (£103bn). Everything else, from fuel duty to the bank levy, is loose change by comparison. _(Neil in the margin: NICs are in effect a second income tax, levied on earnings and split between employee and employer. The 'contributory' framing is largely fiction: it funds general spending, not a ring-fenced pot.)_

![Four taxes pay for almost everything](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/dZSskx0XZxWcAdRdIXNOlA-216c76f9a225-light.png)

Put those four on the same frame, as a share of GDP, and the recent history is striking. Income tax receipts have risen dramatically over the last six years. VAT has flatlined since about 2012, the pandemic aside, reflecting in part relatively subdued consumption growth over the period. The heavy lifting since the pandemic has been done by taxes on income, not taxes on spending.

![Income tax is doing the heavy lifting](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/dZSskx0XZxWcAdRdIXMOYW-ce367520a2d2-light.png)

## The regressive tax objection

The standard objection to any claim that the system is progressive is VAT. It is a fair point, as far as it goes. VAT is a flat-rate tax, and because lower-income households spend a higher proportion of their incomes than higher-income households, a disproportionate amount of VAT is paid by lower-income households, albeit that food is zero-rated. _(Neil in the margin: A single rate (20% here) applied regardless of income. It's the higher spending-to-income ratio of poorer households, not the rate itself, that makes it regressive.)_

But the argument cannot stop there. Income that is saved rather than spent is also taxed, at rates that are equivalent to or exceed VAT: 20%, 40% and 45% on the income those savings produce. Capital gains are taxed at 18% for basic-rate taxpayers and 24% for higher and additional-rate payers. To get a full picture of who pays what, you have to look at taxes on spending and taxes on saving as well as income tax and national insurance. When you do, the regressive-VAT objection carries much less weight than its advocates assume. _(Neil in the margin: CGT falls on the profit when an asset is sold, not on the income it throws off. The lower headline rates partly reflect that gains are often inflated by inflation rather than real returns.)_

## Who pays the income tax?

Now to the heart of it. In 2010–11, additional-rate taxpayers paid £35bn of income tax out of a total of £152bn: 23% of the total. Basic-rate payers paid £69bn, or 45%.

By 2026–27, on HMRC's projections, the total will be £346bn. Additional-rate payers will contribute £138bn of it (40%) and basic-rate payers £93bn (27%). The two groups have swapped places. _(Neil in the margin: These are forecasts, not outturns, so the 2026–27 figures depend on assumptions about earnings growth and frozen thresholds holding as expected.)_

![3% of taxpayers pay 40% of the income tax.](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/tdwnMLo8K10KFz1J94sn4L-1acb6125372b-light.png)

In nominal terms, the take from basic-rate payers is up 35% over those fifteen years. The take from additional-rate payers is up nearly fourfold. Or put another way: fifteen years ago, 27.1mn basic-rate taxpayers paid £34bn more than 200,000 additional-rate payers. Now 1.3mn additional-rate payers pay £45bn more than 31.4mn basic-rate payers. _(Neil in the margin: Nominal means before adjusting for inflation. Over fifteen years prices have risen a lot, so the real-terms increase in the basic-rate take is far smaller than the headline 35% suggests.)_

That is the shape of the system we actually have. Out of 40.4mn income taxpayers, 1.3mn, barely 3%, now pay 40% of all income tax. Even after adjusting for the VAT burden, the lion's share of tax in this country is paid by higher earners, and the burden has shifted dramatically towards them over the last fifteen years.

## How far can this be pushed?

How far this concentration can go before Laffer effects begin to kick in, before the highest earners change their behaviour, their domicile or their effort in ways that shrink the base, is not knowable in advance. My judgement is that we are already uncomfortably close to that point. _(Neil in the margin: The Laffer curve: past some rate, higher taxes raise less because people work less, dodge, or leave. Where that point sits is fiercely contested and impossible to pin down precisely.)_

### Could you abolish VAT?

After last week's piece, a reader wrote in with a question I enjoyed: now that we are outside the EU, is there an argument for abolishing VAT altogether and using the change to drive growth – a free port, in effect, for the whole country?

It is a better question than it first appears. At £183bn a year, VAT is a very big and important generator of revenue, and abolishing it would mean finding that revenue somewhere else. But as a thought experiment it is worth running. Zeroing VAT would deliver a consumer boom, a step down in the price level, potentially much lower interest rates (as long as the gilt market had not panicked) and a very buoyant housing market, among other outcomes. I am not proposing it. It is simply a reminder of how much economic behaviour is shaped by a tax we have stopped noticing.

The tax burden here has shifted dramatically in fifteen years, onto a remarkably small number of people. That is the base from which the next Budget will have to start.