Data and Perspective on the UK’s Neverending Tax Debate

Sometimes, markets seem to behave so simply and obviously that it appears too good to be true—and we find these times are a helpful lesson in showing how stocks work. Case in point: With new data showing the UK’s budget deficit jumped in June despite April’s employer NIC hike, we have read analyses turning to the seeming inevitability of further tax hikes this autumn.^[i] Financial headlines we monitor discussed the political jawboning regarding a potential wealth tax, rattling nerves as data hint at April’s hike causing a speedbump as everyone adjusted.^[ii] Yet UK stocks are up 12.7% year to date, close to four times global stocks’ 3.4%.^[iii] Seems to us this is the latest proof markets move on the gap between expectations and reality.

The NIC hike only took effect in April, so we don’t have much data illustrating its effects. Our research shows myriad variables affect the economy at any given time, so it can be suspect to tie strong or weak data to any one factor. Nevertheless, Exhibit 1 rounds up the main relevant indicators thus far. Overall, we think it is a mixed bag, with a sprinkling of negatives and a smattering of positives.

Exhibit 1: Recent UK Data at a Glance

Source: FactSet and UK Office for National Statistics (ONS), as of 24/7/2025. PMI (purchasing managers’ index) readings over 50 indicate expansion (under 50, contraction). Note, S&P Global released its flash UK PMI report on 24 July and reported its services PMI registered 51.2 in July.

But mixed bag wasn’t the consensus expectation we found in financial coverage when Chancellor of the Exchequer Rachel Reeves announced employer NIC would rise last October. Instead, we found many analyses arguing the measures would weigh on jobs, which would ripple through consumer spending as businesses slashed headcount to tame costs, especially since the tax hike took effect alongside a minimum wage increase.^[iv]

On that front, the data look conflicting, and we think reality is complicated. The official employment data come from the Labour Force Survey (LFS). This survey suffers from dwindling response rates that have raised analysts’, statisticians’ and politicians’ concerns about data quality and accuracy.^[v] The ONS is engaged in a multiyear effort to modernise and fix it but, in the meantime, has flagged the LFS as needing a pinch of salt.^[vi] So we think the hefty employment increase it shows needs an asterisk to acknowledge this uncertainty.

Yet it isn’t clear that the alternative, payroll data, are the real picture, either. This is a statistic-in-development, still in the experimental stage as the ONS refines its approach and evaluates the measure. The ONS pulls from HMRC’s “Pay as You Earn” employer tax filing system.^[vii] This captures all payrolled employees whose wages are over the relevant tax thresholds. But it doesn’t capture self-employment, which the ONS estimates at about 4.4 million people.^[viii] These figures also don’t tell us whether falling payrolls are due to redundancies or voluntary quits, which could have more to do with sociological or demographic factors and general life changes than strictly business decisions (e.g., cutbacks). It is more data, and we always love more data! But like every metric, it isn’t all-telling.

Note, too, falling payrolls long predate April. That metric fell in 9 of 11 months from August 2024 through June.^[ix] Given Reeves didn’t announce the tax hike until October, with most attention in financial headlines then focussed on potential capital gains tax hikes, we think it is inaccurate to pin the entire decline on businesses preparing for higher NIC. In our view, it could well be an after-effect of gross domestic product’s (GDP) small decline in Q3 and Q4 2023, especially given the rampant recession fear at the time.^[x] Labour market data are late-lagging economic indicators, based on our studies.

Whilst we see the case that the tax hike is a modest economic negative, the key for investors, in our view, is that modest negative is better for stock prices than abject disaster. In our experience, stocks pre-price all widely known information, including associated analyses and economic projections. From the time of the tax hike’s announcement to when it took effect in April, we had over five months’ worth of projections and discussions baked into stock prices. Yet aside from the global Liberation Day tantrum tied to US tariffs being more severe than expected, UK stocks have done just fine. They rose through wintertime fears, stumbled with global stocks in the early spring, then enjoyed a robust recovery.^[xi] They continue clocking new highs as we roll through July.^[xii]

Keep this in mind as wealth tax talk likely dominates headlines in the coming weeks and months. We have already seen chatter that such a levy will prompt wealthy households to vote with their feet, starving HMRC’s coffers and taking jobs, investors and entrepreneurs out of the UK.^[xiii] Conceptually, this thinking is sensible. But one, forward-looking stocks are already pre-pricing that scenario, in our view. And two, this all presumes a wealth tax is passable, workable and enforceable. Reliably predicting politicians’ actions is a near-impossible game, in our view, but administrative hurdles abound.

Consider: Tax proposals generally don’t see the light of day unless the Office for Budget Responsibility (OBR), the nonpartisan fiscal watchdog, can score them. That means reasonable revenue projections. But as The Telegraph pointed out earlier this week, the OBR factors in international comparisons, and no recent wealth tax has raised anywhere near the revenue politicians pledged.^[xiv] Instead, they have proven unenforceable and quietly gone away. Then, too, “wealth” can be a squishy measurement. The leading proposal would tax assets worth £10 million or more.^[xv] We think that would be easy enough for big pots of publicly traded assets (e.g., stocks and bonds), but how do you value illiquid assets (meaning they can’t be quickly exchanged for cash), whether real estate, art, collectibles or a stake in a private business? How do you even know who owns what, when startup stakes generally aren’t held in brokerage accounts and shell corporations and offshore accounts are seemingly legion? Already, we have observed discussions that this could be turning to a simple capital gains tax on primary homes, which would just bring the UK in line with the US.^[xvi]

In short, we see a high likelihood that whatever ends up in Reeves’s Budget in October, it will look greatly watered down from what commentators we follow warn of today. Reality beating expectations, just as it seemingly has thus far on the NIC front. We have already seen UK stocks thrive as things went not as bad as feared.^[xvii] The potential for more of this looks quite high, in our view.