Data and Perspective on the UK’s Neverending Tax Debate

Sometimes, markets are so simple and blindingly obvious that it seems too good to be true—and these times are a great object lesson in how stocks work. Case in point: With new data showing the UK’s deficit jumped in June despite April’s payroll tax hike, talk is again turning to the seeming inevitability of new tax hikes this autumn. Politicians are jawboning about a wealth tax, rattling nerves as data hint at April’s hike causing a speedbump as everyone adjusted. Yet UK stocks are up 20.8% year to date, nearly doubling global stocks’ 10.8%.^[i] And that isn’t just currency effects from the weaker dollar: In pounds, the UK’s 12.1% trounces global stocks’ 2.8%.^[ii] Seems to us this is your latest proof markets move on the gap between expectations and reality.

The payroll tax hike, which funds the social safety net, only took effect in April, so we don’t have much data illustrating its effects. There are also myriad variables affecting the economy at any given time, so it can be suspect to tie good or bad data to any one thing. Nevertheless, Exhibit 1 rounds up the main relevant indicators thus far. Overall, it is kind of a mixed bag, with a sprinkling of negatives.

Exhibit 1: Recent UK Data at a Glance

Source: FactSet and UK Office for National Statistics (ONS), as of 7/22/2025. PMI (purchasing managers’ index) readings over 50 indicate expansion (under 50, contraction).

But “mixed bag” was not the consensus expectation when Chancellor of the Exchequer Rachel Reeves announced the payroll tax hike last October. Instead, a deafening chorus warned of a jobs bloodbath that would ripple through consumer spending as businesses slashed headcount to tame costs (the tax hike took effect alongside a minimum wage increase).

On that front, the data look conflicting, but it is complicated. The official employment data come from the Labour Force Survey (LFS)—the UK’s version of the Household Survey in the US’s Employment Situation Report. This survey suffers from dwindling response rates that have raised analysts’, statisticians’ and politicians’ concerns about data quality and accuracy. The ONS is engaged in a multiyear effort to modernize and fix it but, in the meantime, has flagged the LFS as needing a pinch of salt. So the hefty employment increase it shows needs an asterisk.

Yet it isn’t clear that the 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. Essentially, it is the UK’s version of the US’s ADP payroll report. Only where the latter bases its reports from employers’ filings with payroll processor ADP, the ONS pulls from HMRC’s “Pay as You Earn” employer tax filing system. 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. It also doesn’t tell us whether falling payrolls come from layoffs or voluntary quits, which could have more to do with sociological or demographic factors and general life changes than business cutbacks. It is more data, and we always love more data! But like every metric, it isn’t all-telling.

Note, too, that falling payrolls long predate April. That metric fell in 9 of 11 months from August 2024 through June. Given Reeves didn’t announce the tax hike until October, with most attention before then focused on potential capital gains tax hikes, it seems unfair to pin the entire decline on businesses preparing for higher taxes. It could well be an after-effect of GDP’s small decline in Q3 and Q4 2023. Labor market data are late-lagging economic indicators.

But we aren’t in the business of sugar-coating bad news, so if you want to interpret Exhibit 1 as evidence the tax hike was a modest negative, fine by us. The key, for stocks, is that “modest negative” is better than “abject disaster.” Stocks pre-price all widely known information, including fears and economic projections. When the tax hike took effect, we had over five months’ worth of gloom and doom baked into stock prices. Yet aside from the global Liberation Day tantrum, UK stocks have done just fine. They rose through wintertime fears, stumbled with global stocks in the early spring, then enjoyed a robust recovery. They continue clocking new highs as we roll through July.

Keep this in mind as wealth tax talk inevitably dominates headlines. For weeks, we have seen article after article warning it will prompt wealthy folks to vote with their feet, starving HMRC’s coffers and taking jobs, investors and entrepreneurs out of the UK. Conceptually, we get it. But one, those fears are now getting baked in. And two, this all presumes a wealth tax is passable, workable and enforceable. Predicting politicians is a dangerous game, 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 today, the OBR factors in international comparisons, and no recent wealth tax has raised anywhere near the revenue politicians pledged.^[iii] Instead, they have proven unenforceable and quietly gone away. Then, too, “wealth” is a squishy measurement. The leading proposal would tax assets worth £10 million or more. Easy enough for big pots of publicly traded assets (e.g., stocks and bonds), but how do you value illiquid assets, whether real estate 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 legion? Already, talk is turning to a simple capital gains tax on primary homes, which would just bring the UK in line with the US.^[iv]

In short, there is a high likelihood that whatever ends up in Reeves’s Budget in October, it will look greatly watered down from what folks fear today. Reality beating expectations, just as it seemingly has thus far on the payroll tax hike front. We have already seen UK stocks thrive as things went not as bad as feared. The potential for more of this looks quite high.