IFS Zooms In: The Economy How to fix income tax
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Oct 21, 2025 Stuart Adam, a Senior IFS tax expert, and Ben Zaranko, an IFS economist specializing in fiscal policy, delve into the intricacies of the UK's income tax system. They discuss the baffling two-tier tax structure and address the inefficiencies caused by cliff edges and frozen thresholds. The duo highlights how these issues distort work incentives and complicate financial planning for many, especially in the case of childcare subsidies. Moreover, they suggest merging income tax and National Insurance to simplify the system and enhance transparency.
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Frozen Thresholds Cause Fiscal Drag
- Freezing tax thresholds causes 'fiscal drag' by pushing more people into paying tax or higher rates.
- Thresholds matter as much as headline rates for who pays tax and when.
Income Tax Is A Major Progressive Revenue Source
- Income tax is progressive: the top 1% pay a disproportionately large share of income tax receipts.
- Income tax and NICs combined raise about half of total government revenues.
The £100k Allowance Withdrawal Is Obscure And Harmful
- The £100k personal allowance withdrawal creates a big, confusing jump few understand but that causes dramatic incentives.
- Presenting it as allowance withdrawal obscures that it's effectively a 60% marginal tax band.