A good tax system isn’t just about raising revenue, it’s about encouraging the behaviours (working, saving, investing) that create a prosperous economy, writes Harry Bell

With the UK’s public finances up for scrutiny at the Autumn Budget, it seems the main remedy to Healey’s diminishing fiscal headroom is one that is tried, but not necessarily true: taxing the rich. However, before we look for more ways to tax wealth, we need to make sure we aren’t discouraging people from creating it in the first place. 

If we want a prosperous economy, we need people to work, save, invest, build businesses and take risks. People understand the need to pay tax, but there needs to be a reward for playing an active and productive role in boosting the country, rather than a penalty. Tax policy doesn’t just raise revenue, it changes behaviour. The government needs to think much harder about what behaviours they are encouraging, particularly when it comes to individual, isolated taxes. 

Pensions are a good example. People need to be encouraged to save for their retirement, especially when there is evidence that many aren’t saving enough. In fact, our latest research shows that one in six (16 per cent) mass-affluent Brits have either completely or temporarily stopped contributing to their pension, while nine per cent don’t have one at all. Continually changing the rules will make people question whether pensions will still be attractive in 20 or 30 years, which is a terrible long-term strategy. 

A case study: Capital Gains Tax

Capital Gains Tax (CGT) also shows why behaviour matters. A future increase might initially bring disposals forward and create a bump in tax receipts, but what happens afterwards? People can simply choose not to sell. The Office for Budget Responsibility (OBR) specifically recognises both bringing disposals forward and “locking in” gains by delaying disposals, potentially even until death, as behavioural responses to capital taxes. The economy will not benefit from a tax system where the tax-efficient decision is simply to do nothing.

The same goes for entrepreneurs, and the government needs to be encouraging people to take risks, build businesses and employ people. Business Asset Disposal Relief (BADR) has already become less generous, with the applicable CGT rate rising to 18 per cent from April 2026. A significant increase in CGT without appropriate consideration of BADR could seriously damage the incentive to build, and ultimately sell, a business.

The government should also address some of the strange tax traps in place, and resist the urge to introduce anymore, or push people into higher bands. The loss of the personal allowance above £100,000 means someone can face a very high effective marginal rate over a relatively narrow band of earnings, while the High Income Child Benefit Charge creates another taper for families. People should be incentivised to work hard, progress and reap some of the rewards, rather than trying to fall under arbitrary points where earning the next pound suddenly becomes far less worthwhile. 

More broadly, the tax system is so complicated and intertwined that changing one thing can have consequences elsewhere. CGT interacts with inheritance tax, pensions and estate planning, for example. The Treasury needs to look at the system as a whole and the ripple effect that could occur due to a singular change, rather than treating taxpayers as passive entries on a spreadsheet.

It’s widely understood that a good tax system raises revenue, but it should also encourage the behaviours that create a prosperous economy: working, saving, investing and building businesses, and ultimately, reaping the rewards of doing all those things. 

Harry Bell is director of financial planning at Raymond James