North-South divide: UK tax system barrier to overcoming regional wealth inequality, report finds

The research found that people living in the North will have, on average, £210,000 less wealth than individuals in the South East, largely due to the current tax system.

Speaking to the BBC this week, Keir Starmer said that he wants to “get rid of the North-South divide.” “I’m absolutely determined that we will end that divide. That’s what we’re committing to,” said the PM. Recent research has found that the UK tax system is structured in a way that allows some of the wealthiest individuals, particularly those concentrated in London and the South East, to pay lower tax rates on their overall income compared to those who earn their income from work, such as nurses and teachers.

The report argues that Britain’s tax system, which under-taxes income derived from wealth while heavily taxing earned income, is trapping people in the North of England in a “wealth inequality spiral.” The research was conducted by the Institute for Public Policy Research (IPPR) and IPPR North, which pushes for a fairer, greener, and more prosperous society. The report notes how regional wealth disparities are widening, with those in London and the South East being more likely to benefit from the favourable tax treatment of wealth-generated income. It warns that by 2030, individuals in the North will have on average, £210,000 less wealth than their counterparts in the South East, largely due to the current tax system.

Despite housing a quarter of the UK population, London and the South East generate around 40 percent of the country’s investment income, with an increasing share of total unearned income accumulating in these regions, according to the report. After examining the regional distribution of tax payments and comparing this with the tax advantages for wealth-based income versus income from work, the charity concludes that the tax system is exacerbating regional inequalities.

The report finds that the tax benefits associated with income from wealth – spanning capital gains tax, dividend tax, and inheritance tax – predominantly benefit those in London and the South East.

To address these disparities, the IPPR recommends taxing income from wealth at the same rate as earned income, starting with aligning capital gains tax with income tax. The charity advocates for equal taxation of all income types and suggests implementing a unified tax schedule that includes capital gains and dividends, to match the taxation of earned income by the end of this parliamentary term. In the short term, it proposes equalising capital gains tax with income tax in the upcoming budget.

The report also calls for reforms to property tax. It supports replacing the outdated and regressive council tax with a proportional property tax in the long term, aiming to reduce regional inequalities. In the short term, it proposes immediate reforms, such as higher levies on empty homes and the introduction of two additional higher council tax bands in the next budget.