Progressive tax explained
There are a few different types of tax imposed in the UK, and it can be tricky to understand which apply to you and when. Progressive tax is a type of tax that mainly impacts high-income earners. On this page, you’ll find out more about what progressive taxes are, what types of taxes are progressive, how they work and how they may affect you.
Effect: Progressive tax tends to affect those on a high income more, because you’ll pay more tax the more you earn
Tax band: In the UK, the amount of progressive tax you’ll pay depends on the income tax band you’re in
Low-income households: Progressive tax is designed to help low-income earners keep more of their income in their pockets
What is progressive tax?
Progressive tax is a type of tax that imposes higher rates on higher income earners as opposed to those on a lower income. Basically, progressive tax is based on your ability to pay. In the UK, the income tax burden increases as taxable income increases.
This means that the more you earn, the more you’ll need to pay in tax. As you earn more, you’ll move up the income tax brackets, which group taxpayers by salary. The more you earn, the higher your tax bracket, and the more income tax you’ll pay.
How does progressive tax work?
Progressive tax is designed to help people on lower incomes have enough left in their pockets to pay for basic necessities such as food, transportation and shelter.
Progressive tax allows low-income earners to spend a larger percentage of their income on these necessities, as opposed to spending it on tax. This type of tax doesn’t necessarily harm the wealthy, even though you’ll pay more tax if you’re a high-income earner, because even after you’re taxed, you should still be able to comfortably afford these kinds of basic necessities.
However, progressive tax may affect higher income earners as it can impact your ability to invest lump sums in stocks, add more money to your retirement savings, or limit the purchase of luxurious items.
Why is progressive tax considered to be good?
Some people consider progressive tax to be beneficial, arguing that it equates to a fairer system where the needs of those who earn less are taken into account.
It also requires higher earners to take on a larger share of the tax burden. This historically hasn’t discouraged them from earning more, and it allows low earners to strive to earn more without being disheartened by paying what could be considered an unfair amount of tax.
Examples of progressive tax
Income tax rates* in the UK are progressive. Exactly how much income tax you pay depends on the tax band you’re in. As illustrated by the table below, basic-rate taxpayers pay 20% in income tax, while higher-rate taxpayers pay 40%. Additional-rate taxpayers pay 45% tax rate if their income is over £150,000.
The UK tax bands for 2023/24 are as follows:
| Tax Band | Taxable Income in England, Wales and Northern Ireland | Tax Rate |
|---|---|---|
| Personal allowance | £0 - £12,570 | 0% |
| Basic rate | £12,571 - £50,270 | 20% |
| Higher rate | £50,271 - £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
| Tax Band | Taxable Income in Scotland | Tax rate |
|---|---|---|
| Personal allowance | £0 - £12,570 | 0% |
| Starter rate | £12,571 - £14,732 | 19% |
| Basic rate | £14,733 - £25,688 | 20% |
| Intermediate rate | £25,689 - £43,662 | 21% |
| Higher rate | £43,663 - £125,140 | 42% |
| Top rate | Over £125,140 | 47% |
Capital gains tax
Another type of progressive tax in the UK is capital gains tax. This is a type of tax payable on any profit you make when you sell an asset that has increased in value. For example, if you buy an antique vase for £3,000 and later sell it for £7,000, you may have to pay capital gains tax on the £4,000 you made in profit. This tax may be considered progressive because, firstly, it’s more likely that wealthier people will sell expensive assets, and secondly, because you are exempt from capital gains tax if your annual earnings are below £12,300, or if the asset itself is worth less than £6,000.
Stamp duty
Stamp duty land tax is another type of progressive tax. Stamp duty land tax (SDLT) is a form of tax payable when you purchase any property, including property abroad. In 2022/23, stamp duty is currently payable when you buy a residential property costing £250,000 or more, a non-residential land or property for £150,000 or more (different rules apply for first-time buyers). As the table below shows, the rates of tax charged on residential property above this threshold rise progressively as the property price increases.
| Purchase price of property | Stamp duty rate |
|---|---|
| £0 - £250,000 | 0% |
| £250,001 - £925,000 | 5% |
| £925,001 - £1,500,000 | 10% |
| £1,500,001 and above | 12% |
As you can see, the more expensive the property, the more tax you’ll pay. Higher rates of stamp duty are also charged on purchases of additional residential properties (above £40,000). You’ll normally need to pay an extra 3% on top of the rates shown in the table above. Of course, it’s more likely that people buying high-value properties or second houses will be higher-earners, hence why stamp duty is considered a regressive tax. The Scottish and Welsh governments operate their own stamp duty system. In Scotland, it’s called the Land and Buildings Transaction Tax, while in Wales you’ll pay the Land Transaction Tax if your purchase was completed on or after 1st April 2018.
Value Added Tax (VAT)
Although Value Added Tax (VAT) is considered a regressive tax, or a type of tax that is the same for everyone, regardless of your income, it may be considered to have an element of progressivity. This is because people who earn higher incomes will likely spend more on luxury items and everyday shopping, meaning that they’ll typically pay more VAT.
Inheritance tax
Lastly, inheritance tax could also be considered a type of progressive tax. Inheritance tax is a form of tax levied if you inherit money and assets from someone who has passed away. It can be considered progressive because the tax doesn’t apply to estates worth less than £325,000.
Advantages & disadvantages of progressive tax
Progressive taxes have the advantage of reducing the tax burden on low-income earners. This keeps more money in their pockets and helps them be less financially restricted.
A progressive tax system could be considered more fair, because it places a larger burden on those who are better equipped to carry it.
Critics of progressive tax, however, believe that it’s a disincentive and that it opposes the means of income redistribution, which impacts high-income earners. Some feel that progressive tax is a punishment for working hard.
Progressive vs regressive tax explained
Progressive and regressive taxes are pretty much opposites. In a regressive tax system, low-income earners are disproportionately affected because, effectively, a larger percentage of their income is taxed than those with higher incomes.
For example, sales tax is a regressive tax. Let’s say that two individuals, one with an income of £10,000 and one with an income of £5,000, each purchase groceries worth £500.
For person one, who earns more, £500 is the equivalent of 5% of their total income (£500 divided by £10,000 is 0.05; 0.05 x 100 = 5%).
For person two, who earns a low income, £500 is the equivalent of 10% of their total income(£500 divided by £5,000 is 0.10; 0.10 x 100 = 10%).
Although they pay the same amount for their groceries, they are affected differently because the low income earner pays a greater percentage of their total income.
Who benefits from progressive tax?
Progressive tax is calculated on household income, which arguably means that everyone benefits because it allows everyone to afford their basic needs.