Leading AI and tax specialists have warned that the government’s failure to reform the UK’s tax system for the age of automation could trigger what one expert calls a “fiscal collapse engineered by the Treasury itself.”
Ahead of the November Budget, Chancellor Rachel Reeves faces an unprecedented balancing act: investing billions in artificial intelligence to boost growth, while preventing AI-driven automation from hollowing out the country’s tax base.
The UK currently relies heavily on income tax and National Insurance Contributions (NICs), which together account for more than 40 per cent of government revenues. But as AI rapidly automates tasks in customer service, accountancy, law and software engineering, experts say the result could be a shrinking workforce — and a shrinking tax take.
Colette Mason, author and AI systems architect at Clever Clogs AI, said that while AI could boost productivity, it also poses a structural risk to the fiscal system.
“Both the OECD and the Institute for Fiscal Studies have shown that companies get significant tax breaks for automation equipment while paying heavy National Insurance on human workers,” she said.
“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.”
Mason argued that the UK’s tax model must be redesigned to capture AI-driven wealth and reward businesses that use technology to augment, rather than replace, human work.
“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.”
Luke James, tax director at Gravitate Accounting, said the Treasury’s dependence on income-based taxation had become a long-term vulnerability.
“Income tax and National Insurance now account for around 42 per cent of receipts, up from 36 per cent two decades ago. As AI reshapes the workforce, this base will erode — and marginal rate rises can’t fix it.”
James said an “AI levy” might provide a short-term revenue patch but warned that poorly designed taxes could stifle innovation and SME growth.
“Future frameworks should reward human-augmenting technologies and be paired with investment in skills, infrastructure, and retraining,” he added.
“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, chief executive of Impact Icon AI, said too many companies were “outsourcing accountability” to consultants promising efficiency gains without assessing the human cost.
“Businesses get tax breaks for automation while paying heavy NI on people. That’s backwards,” she said.
“If your AI consultant talks only about time saved and profits — not your people or culture — ask yourself if that’s a long-term partner. When you cut roles without reinvesting freed-up capacity, you’re eroding your own future.”
She warned that removing entry-level roles could “cripple succession pipelines,” adding: “Who will be your future leaders if AI eliminates junior hiring? Build AI that assists, not replaces. Think human-first, not tech-first.”
Tony Redondo, founder of Cosmos Currency Exchange, said the speed of the AI revolution meant the Treasury could not afford to delay reform.
“Gradual change over 20 years allows adaptation. But AI’s transformation is happening in five to ten — it demands urgent action,” he said.
Redondo rejected the idea of a “robot tax” as “administratively unworkable”, warning it could push capital offshore.
“How do you value AI’s labour-equivalent? Aggressive profit levies risk capital flight to low-tax jurisdictions,” he said. “A pragmatic middle ground is to broaden the corporate tax base to capture digital services, modestly raise capital gains and dividend taxes, and strengthen enforcement.”
Reeves faces a growing policy dilemma: how to fund the public sector sustainably in a world of falling payrolls, while encouraging the innovation the UK needs to compete globally.
As AI supercharges productivity but undermines traditional tax flows, economists warn that the government must modernise the fiscal framework before it breaks.
As Mason put it: “We’re standing on the edge of an automation boom — and the longer we wait to rebuild the tax base, the steeper the fall will be.”
