British workers are facing the sharpest tax squeeze in the entire OECD, according to the organisation’s new Taxing Wages 2026 report released on Wednesday (22 April).
The tax wedge, the total share of labour costs eaten up by income taxes and social security contributions, minus any cash benefits, jumped by a staggering 2.45 percentage points for a single average-wage worker in the UK in 2025.
That was the largest increase of any developed economy, far outpacing the relatively small 0.15-point rise in the OECD average.
This means UK workers are now handing over a bigger chunk of their pay to the government than at any point in recent memory, even as real wages finally began to recover in most countries.
The UK stands out in a year of broad tax rises
Across the OECD, labour taxes edged higher in 2025. The average tax wedge for a single worker earning the national average wage reached 35.1% of total labour costs, the highest level in years. But nowhere did it spike as dramatically as in Britain.
The UK’s increase was driven by two main factors highlighted in the report:
- Fiscal drag: Wages rose with inflation and earnings growth, but tax thresholds and personal allowances were not adjusted, pulling more income into higher tax bands.
- Higher employer National Insurance contributions: The government raised the rate and lowered the threshold at which employers start paying, effectively increasing the overall cost of labour.
The OECD notes that these changes, announced in the October 2024 Budget, hit both take-home pay and employer costs directly.
For context, the UK’s tax wedge for this typical worker had fallen to around 29.4%–29.5% in 2024 after earlier employee National Insurance cuts. The 2025 reversal wiped out much of that relief and then some.
For the average UK worker roughly 31–32% of total labour costs now disappear in taxes and contributions.
That leaves less in the pocket for bills, mortgages, or saving, at a time when living costs remain elevated and interest rates are still weighing on households.
The pain is especially acute for certain households. For a single parent with two children earning 67% of the average wage, the UK saw one of the largest tax-wedge increases in the OECD (up 4.3 points), thanks to a combination of fiscal drag, higher employer contributions, and reduced value of some tax reliefs and benefits relative to earnings.
Employers also feel the pinch. Higher National Insurance raises the cost of hiring and retaining staff, which can feed through to slower wage growth or fewer jobs over time.
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