Defence Spending Tax Rise on Middle Earners: Resolution Foundation 2026

The Resolution Foundation thinktank has told Chancellor John Healey that funding significantly higher defence spending may require a tax rise on middle earners. This bold recommendation comes as the UK seeks to meet its NATO pledge of 3.5% of GDP on defence by 2035, a commitment that would cost an estimated £28 billion annually.

Understanding the Tax Wedge and Defence Funding

The thinktank's report, titled "Thin End of the Wedge," highlights that despite recent tax increases totaling £70 billion a year since Labour took office in 2024, the UK's tax wedge—taxes on earnings minus benefits—remains low compared to international standards. According to James Smith, chief economist at the Resolution Foundation, "Despite recent increases, the UK still taxes average earners less than most of our international peers."

This analysis suggests that to fund the defence spending pledge, the government may need to ask average workers to contribute more. The report notes that tax rises under former Chancellor Rachel Reeves resulted in a 2.4 percentage point jump in the tax wedge last year, the largest for any OECD country, yet the UK's tax wedge at 32.4% still trails many peers.

The Fiscal Challenge Ahead

Chancellor Healey has indicated he will wait until next year's spending review before presenting a detailed plan to meet the defence spending target. However, the Resolution Foundation warns that without additional revenue, the 3.5% GDP commitment may be unattainable. The report argues that the UK's fiscal position requires tough choices, and raising taxes on middle earners might be one of the few viable options.

Comparison of Tax Wedge in OECD Countries

The table illustrates that while the UK's tax wedge increased significantly last year, it remains below many European counterparts. This suggests there is fiscal headroom to raise taxes, but such a move would be politically sensitive.

Key Takeaways from the Resolution Foundation Report

• Defence spending target: Meeting 3.5% of GDP by 2035 requires £28 billion annually.
• Tax wedge remains low: Despite recent rises, UK taxes on average earners are below OECD average.
• Potential tax rise: Middle earners may face higher taxes to fund defence.
• Political implications: Raising taxes on middle earners is a contentious issue for the Labour government.
• Timeline: Healey to present a plan in next year's spending review.

Political Reactions and Implications

The proposal has sparked debate among policymakers. Some argue that increasing taxes on middle earners could undermine economic growth and public support. Others contend that defence spending is a national priority that requires adequate funding, even if it means asking citizens to contribute more.

Chancellor Healey, who resigned from the previous government over defence funding concerns, now faces the challenge of balancing fiscal responsibility with national security needs. His decision will likely shape the UK's defence posture for years to come.

What This Means for UK Taxpayers

If implemented, a tax rise on middle earners could affect millions of households. The Resolution Foundation suggests that while the UK's tax wedge is low by international standards, the political feasibility of increasing it remains uncertain. The report calls for a broader debate on how to fund public services and defence in a sustainable way.

Conclusion

The Resolution Foundation's call for a tax rise on middle earners to fund defence spending underscores the fiscal challenges facing the UK government. As Chancellor Healey prepares his spending review, he must weigh the need for increased defence investment against the economic and political costs of higher taxes. The decision will have lasting implications for the UK's security and its citizens' wallets.

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