Chancellor John Healey has been urged to address Labour’s defence spending ambitions through tax increases targeted at middle-income earners. The Resolution Foundation, in a recent report titled Thin End of the Wedge, advises that meeting the £28 billion annual commitment required for defence cannot be achieved without asking average workers to contribute more.
According to James Smith, chief economist at the Resolution Foundation, “Despite recent tax increases, the UK still taxes average earners less than most international peers.” He emphasises that, “No other OECD wealthy nation combines a larger public sector with a lower tax burden on average workers, so politicians promising both outcomes are being unrealistic.”
Smith further argues there is a strong justification for sharing the costs of increased defence spending widely, which should include higher tax rates on middle earners, given the broad benefits expected.
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Based on OECD data, the gross wage for an average UK worker is projected to be around £56,000 in 2025. This figure, however, surpasses the median full-time earnings of £39,000 as estimated by the UK’s Office for National Statistics (ONS) for April 2025. The Resolution Foundation highlights that the median earnings are roughly 67 per cent of this OECD average, equating to approximately £38,000.
Personal taxes on those middle earners remain relatively low when viewed from a historical perspective. For instance, an individual earning the UK median of £33,000 in April 2025 (after recent National Insurance increases) faces a lower effective tax rate than prior to the 2008 financial crisis.
For a single earner on the OECD average wage of £56,000, the tax wedge increased from 29.9% in 2024 to 32.4% in 2025, marking the largest rise among OECD countries. Nonetheless, the UK’s average tax wedge remains 2.7 percentage points below the OECD average and is lower than in countries such as Ireland and Japan.
This situation stems from the UK starting 2024 with labour taxes at relatively low levels internationally and historically. In 2024, the UK had the lowest tax wedge among G7 nations, falling behind even the United States and Canada. Following recent adjustments, the UK ranks ninth lowest among 33 wealthy OECD countries.