November Budget: "Get AI wrong and the Treasury will engineer its own fiscal collapse"

AHEAD of the November Budget, AI and tax specialists have warned the government that if it gets AI wrong, “the Treasury will engineer its own fiscal collapse”. The UK's high reliance on Income Tax and National Insurance Contributions (NICs), one  AI expert has said, has created a serious fiscal vulnerability, as AI drives labour-replacing automation, which does not pay tax.

Chancellor Rachel Reeves is walking a fiscal tightrope in her November Budget. While the government is backing AI heavily, earmarking billions for supercomputers, AI Growth Zones and public sector transformation in a bid to boost productivity and power economic recovery, this could prove a double-edged sword.

After all, the more successful AI becomes at boosting output by using tech to transform inefficient workflows, the more it erodes the tax base built on taxing human work.

Income tax and National Insurance currently make up a significant percentage of government revenue, but as AI automates tasks across customer service, legal research, accounting and coding, companies will get more productive with fewer people. 

As a result, payroll shrinks and tax receipts fall. And while corporate profits may surge, they're taxed far less aggressively than wages. 

Colette Mason, Author & AI Systems Architect at Clever Clogs AI, says Labour must reform the tax system now to capture AI-driven wealth, or watch revenues become structurally unsustainable as productivity soars and employment-based tax plummets.

She warned: "Both the OECD and the Institute for Fiscal Studies (IFS) have shown that companies get significant tax breaks for automation equipment while paying heavy National Insurance on human workers.

"In other words, we've built a system that financially punishes employment and rewards replacement. That's not innovation policy, that's fiscal self-harm.

"If the Government fails to act, they won't just create an unstable society. Get AI wrong and the Treasury will engineer its own fiscal collapse.

"The question isn't whether to reform the tax system for AI. It's whether we do it strategically now, or desperately later when the damage is done."

“Tax policy must be immediately redesigned to reward technologies that actively boost human skill and productivity, keeping our tax base robust, while withholding incentives from any system that treats labour as a disposable cost factor.”

Luke James, Tax Director at Gravitate Accounting, agreed that the Treasury faces a delicate balancing act "As AI reshapes the workforce, the Treasury faces a challenge: Income Tax and National Insurance now account for around 42% of tax receipts, up from 36% two decades ago.

"With fewer employees, this base will erode. This is something marginal rate rises cannot fix. While an AI levy may offer a short-term response, policymakers must avoid discouraging growth, especially among SMEs.

“Future frameworks should reward human-augmenting technologies and be paired with investment in skills, infrastructure, and retraining.

"As wealth concentration grows, balancing capital and corporate taxation will be vital to fund public services sustainably. This demands coordinated international action to prevent tax base erosion and protect competitiveness.”

Mitali Deypurkaystha, CEO at Newcastle upon Tyne-based Impact Icon AI, said businesses must think human-first, not tech-first: "What’s missing in this debate is accountability — ours. Yes, government must act; companies currently get tax breaks for automation yet pay heavy NI on people. But too many AI consultants sell ‘efficiency gains’ without asking what happens to the humans those gains replace. That’s irresponsible.

"Business owners: if your consultant talks only about time saved and profits, not about your people or culture, ask: is this a long-term partner? When you cut roles without reinvesting freed-up capacity, you’re not saving costs, you’re eroding your future.

"For example, who will be your future leaders if some hotshot AI consultant implements AI that removes the need for entry-level hiring? Our duty is clear: find efficiencies, then help leaders redeploy saved time into human potential.

“Build AI that assists, not replaces. Think human-first, not tech-first. Then, government must reward those who augment humans, not make them redundant. Do that and there’ll be no fiscal collapse.”

Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, said one major issue is the speed at which AI is transforming economies: "Gradual change over 10-20 years allows adaptation, whereas rapid transformation in 5-10 years demands urgent action.

He added that pure robot taxes are administratively unworkable and could see money head overseas: “How do you value AI's labour-equivalent? Aggressive profit levies risk capital flight to low-tax jurisdictions.

"A pragmatic middle ground is broaden the corporate tax base to capture digital services, modestly increase capital gains/dividend taxes and strengthen enforcement.”