Success Is Now A Taxable Offence In Labour's Britain

Britain's Uneasy Bargain: Taxing Wealth to Fund a Growing Welfare Bill

The Burnham government is asking a shrinking group of productive taxpayers to underwrite an expanding welfare state. The arithmetic is beginning to strain.

Two data points published within hours of each other on the weekend of 20 September crystallised a question that has hung over British fiscal policy for the past two years. The first, drawn from Department for Work & Pensions figures obtained under freedom of information laws, showed that households containing at least one foreign national received a record £11.9bn in Universal Credit in2025, a quarter more than the year before. The second, reported by the Daily Telegraph, revealed that Andy Burnham, prime minister, and John Healey, chancellor, were actively reviewing a proposal to raise capital gains tax to as much as 45%, a £14bn measure intended to fund a £20bn increase in the income tax personal allowance.

Taken together, the two figures describe a policy direction more clearly than any ministerial speech. The state is expanding its transfer commitments while narrowing the base from which it collects the revenue to pay for them. The tension between those two trends is the defining feature of the current government's fiscal strategy, and increasingly its political vulnerability.

The Welfare Arithmetic

The DWP data warrants careful reading. The £11.9bn headline refers to Universal Credit paid to households where at least one member is a foreign national, a category that includes refugees, EU citizens with settled status and holders of indefinite leave to remain. Government sources note that around half of all Universal Credit recipients are in some form of work. The claim that £12bn is being paid to “foreigners”, as several tabloid front pages framed it, is not quite what the numbers show.

Even with that qualification, the trajectory is arresting. Payments to such households rose from £7.5bn in 2023 to £9.5bn in 2024 and £11.9bn in 2025, according to figures compiled by the Centre for Migration Control from DWP data.They now account for approximately one in six of all Universal Credit pounds disbursed. Two-thirds, £7.7bn, went to households in which nobody was inwork.

The underlying caseload has grown in parallel. The DWP's May 2026 release recorded 8.4mn people on Universal Credit, the highest on record, of whom more than 1.27mn held a non-UK/Irish immigration status. Analysts at the Centre for Migration Control link the increase to the roughly 4.2mn arrivals to the UK between 2021 and 2024, a cohort now moving into eligibility for permanent settlement and the benefit entitlements that accompany it. The Home Office's own estimates put the potential net lifetime fiscal cost of allowing foreign care workers alone to settle in Britain at up to £10bn.

Shabana Mahmood, the home secretary, has proposed lengthening the qualifying period for indefinite leave to remain from five to ten years, and to fifteen years for foreign care workers. As many as 100 Labour MPs, including Angela Rayner, the communities secretary, are understood to oppose applying the changes retrospectively. Mr Burnham has yet to signal which side of that argument he will take.

The Revenue Side

To fund a welfare bill of this trajectory, and to meet defence, health and net zero commitments in a slow-growing economy, the government has raised taxation to a level not seen in peace time.

Rachel Reeves's November 2025 Budget added £26.1bn in tax measures on top of roughly £40bn announced the previous year. The two packages together took the UK tax take toward 38% of GDP, a post-war high. The Office for Budget Responsibility now projects real GDP growth of 1.1% in 2026 and an average of about 1.5% a year over the remainder of the forecast period, in part reflecting weaker productivity assumptions[7].

The composition of the tax rise matters as much as its size. The chancellor declined to raise the headline rates of income tax, national insurance or VAT, the three levies her manifesto ruled out. Instead, she extended the freeze on income tax thresholds by three years, to 2031, a measure the Treasury expects to raise £12.4bn and to draw an additional 1.7mn people into paying tax or into higher bands. Nearly 1 in 4 taxpayers will be paying the higher or additional rate within 5 years, according to the Institute for Fiscal Studies.

Alongside the threshold freeze, the Budget imposed a 2p rise in tax on dividends, savings and rental income; a mansion tax on properties worth more than £2mn; a £2,000 cap on salary-sacrifice pension contributions expected to raise £4.7bn a year; a 3p-per-mile levy on electric vehicles; and £1.1bn of additional tax on online gambling. Ms Reeves, in her Budget speech, acknowledged that “maintaining these thresholds is a decision that will affect working people. I said that last year, and I won't pretend otherwise now”.

Helen Miller, director of the IFS, described the package as “spend now, pay later”: more borrowing in the near term, with the fiscal repair concentrated at the end of the parliament. “It's one thing to promise a reduction in borrowing,” she told the Guardian,“ and another to actually deliver it.”

The Next Tightening

Less than a year on, Mr Burnham and Mr Healey are considering a further shift. A Budget submission from Dale Vince, the Ecotricity founder and Labour donor, proposes equalising capital gains tax with income tax rates, taking the top CGT rate to45 per cent from its current 24% to fund a £3,000 increase in the personal allowance. The Centre for the Analysis of Taxation, a think-tank, estimates the measure could raise up to £14bn on a static basis. Mr Vince's pitch, presented to the Treasury, is that “wealth is being taxed more lightly than work.”

The static estimate is doing considerable work in that sentence. HMRC's own historic behavioural elasticity assumptions imply that a rise in CGT of the magnitude proposed would produce a materially smaller dynamic yield as taxpayers defer or restructure disposals. The Treasury raised £24bn from CGT in 2025-26; a doubling of the headline rate would not double the take.

The evidence base for behavioural response is already emerging from an earlier Reeves measure. HMRC data published in July 2026 showed that 9,000 non-domiciled taxpayers left the UK or changed their tax status in the year to April 2025, following the abolition of the two-centuries-old non-dom regime. New arrivals under the successor “Foreign Income & Gains” framework fell 14%. The net loss of 1,200 taxpayers is small in headcount, but the group in aggregate contributed £13.6bn a year in UK tax.

Leslie MacLeod-Miller, chief executive of Foreign Investors for Britain, warned that “Britain is losing internationally mobile wealth at an accelerating pace” and that “the exodus of wealth will only get worse if the government does not introduce a competitive tax regime”. Graeme Privett of the accountants Hays Mac observed that “talk of wealth taxes .. . [is] far from inspiring greater longer-term confidence in the UK as a home for wealth creators.” The full impact of the non-dom abolition will not appear in HMRC returns until the 2025-26 data are published next year.

Independent researchers have cast doubt on the more dramatic exodus estimates. Henley & Partners, the private residency and citizenship advisory, withdrew its widely quoted figure of 16,500 UK millionaires leaving in 2025 in August 2026, after questioning by the Tax Justice Network. Whatever the true number, the direction of travel is not seriously disputed by tax practitioners. The taxpayers who fund a disproportionate share of the yield are also those most able to relocate.

An Older Debate, On Record

The political sensitivity of the tax-and-transfer question was underlined in June, when a batch of private correspondence released as part of the “Mandelson Files”, documents disclosed by the Commons in connection with Peter Mandelson's dismissal as ambassador to Washington, contained an exchange between Mr.Mandelson and Pat McFadden, work and pensions secretary, from May 2025.

Mr Mandelson wrote: “Every meeting I have is ‘who can we tax in order to pay benefits to others?' They're asking the wrong questions”.

The remark, which Mr Mandelson's colleagues have subsequently characterised as an expression of frustration with the framing rather than an endorsement of it, none the less captures the operating assumption inside the government during the drafting of the November 2025 Budget. It also sits uneasily alongside the older Mandelson formulation, from a 1998 speech in Silicon Valley, that New Labour was “intensely relaxed about people getting filthy rich, as long as they pay their taxes”. The premise of that earlier phrase was that private wealth creation and public revenue were complementary. The premise of the Mandelson remark is that they are, at the margin, in tension.

Why the Government is Where It Is

Three factors are pulling policy in the same direction.

The first is arithmetic. The UK is running a structural deficit forecast to reach £138bn in 2025-26, against a debt-servicing bill now larger than any department other than health. With the 3 big rate-based revenue tools ruled out, the government is left with threshold drag, wealth-adjacent bases and eligibility restrictions, measures that raise real money only slowly, and that concentrate the pain on relatively narrow constituencies.

The second is coalition management. Mr Burnham succeeded Sir Keir Starmer in July 2026 on a distinctly leftward platform, promising a “10-year mission” of re-industrialisation and “the biggest rebalancing of power our country has seen”. The parliamentary party that installed him is disproportionately drawn from MPs opposed to the two-child benefit cap and to non-dom relief. MsReeves's decision to scrap the cap and to raise the mansion-tax threshold in November was, on the account of Labour insiders quoted by the Guardian, essential to the chancellor's political survival. The Vince CGT proposal serves a similar function: a redistribution package sufficient to satisfy the party's soft-left majority.

The third is intellectual. The Vince submission's central claim, that “wealth is taxed more lightly than work”, is defensible as a static observation about marginal rates. It is more contestable as a dynamic proposition. CGT is levied on nominal, unindexed gains; dividends are paid from profits that have already borne corporation tax. Governments that treat the wealth base as fixed will discover its elasticity only through the revenue disappointment that follows.

Where This Leads

The most likely outcomes of the current trajectory are visible in the data.

Wealth flight will continue at the margin. The 1,200 net non-dom departures already recorded are unlikely to prove the ceiling; a rise in the CGT headline rate would extend the pattern to a broader group of internationally mobile founders, family offices and later-stage investors. Ireland, Portugal, the UAE and the US are the principal beneficiaries. The revenue effect will lag the policy signal by two to three years.

The tax base will continue to narrow. As mobile taxpayers relocate, the burden falls harder on the immobile, mid-career professionals in the higher-rate band, small business owners, savers whose pension pots exceed the tightened allowances. The IFS notes that the UK tax burden is at its highest since 1948 even as the effective yield per productive worker deteriorates.

Growth will remain the binding constraint. The OBR's downgraded productivity assumption of around 1%, and its medium-term real GDP forecast of about 1.5%, imply that the fiscal envelope cannot fund a rising welfare state, an ageing population, higher defence spending and the net zero transition simultaneously. Absent stronger growth, one of those commitments will have to give.

Politically, the space between the government's technocratic framing and the tabloid version of the same numbers is being filled by Reform UK, which is polling at levels that suggest the next election is no longer a two-horse race. Chris Philp, shadow home secretary, has argued that “paying unemployed foreigners is an insult to hard-working taxpayers; Robert Jenrick, Reform's treasury spokesman, warned that “the Boris wave risks becoming permanent and will cost taxpayers tens of billions more”. The mainstream parties' inability to advance a credible alternative narrative is now a material electoral risk.

The Reckoning, Deferred

Ms Reeves's November Budget, in the IFS's characterisation, deferred the fiscal adjustment to the back end of the parliament. The Vince CGT proposal, if adopted, would extend the same pattern: near-term political dividends funded by a revenue assumption that behavioural evidence suggests will not fully materialise. At some point either productivity growth accelerates, a prospect the OBR does not currently forecast, or the government's expenditure commitments will need to be revisited more explicitly than either the new chancellor or the new prime minister has yet acknowledged.

Britain's post-war settlement was built on the presumption that a growing economy would fund a growing state. For most of the two decades since the financial crisis, that presumption has held only by successively raising the tax burden on a comparatively static base. The Burnham government has inherited the arithmetic and, on the evidence of its first three months, is choosing to sharpen the trade-off rather than resolve it.

Whether that choice is politically sustainable will depend, in the end, on whether the people paying the bill continue to accept the terms.