Consider the following scenario: a marketing executive takes on a large new client and needs to scale up their advertising operations. They face a choice between two options: they can employ a person, or they can pay a subscription for an AI agent.
But our tax system means the playing field is far from level.
If the employer opts for the AI agent, they pay 20% in Value Added Tax (VAT).
If they opt for the human, they pay employer National Insurance Contribution (NIC) and they must compensate the employee for their income tax and employee NIC. The average “tax wedge” – the total of these taxes – was 31.4% in 2025, significantly higher than the tax they would pay for the AI alternative.
We are actively incentivising employers to find alternatives for human labour.
There is a very real possibility that, as AI develops further, ever more employers seek to reduces costs – and taxes – by laying off workers.
Politicians are starting to understand this. London Mayor Sadiq Khan dramatically warned of AI becoming a “weapon of mass destruction of jobs”. Even Technology Secretary Liz Kendall recently conceded that “some jobs will go” as businesses adopt AI.
Silicon Valley tech-optimists would have you believe this is no bad thing. Before long most of us will be earning a Universal Basic Income simply for existing. Liberated from the shackles of work, we will be free to write poetry and sip pina coladas in a life of endless leisure.
If it sounds too good to be true, it probably is.
For most people, work is more than just a means of earning an income. It adds purpose and structure to life. It provides a forum for social interaction and a means for contributing to society.
There is intrinsic value in employment. We should be incentivising employers to provide it rather than punishing them.
A labour market exodus would also leave an enormous black hole in public finances.
Work-related taxes are not just the costliest for employers but the most lucrative for the Treasury. Last year, income tax and national insurance contributions (NIC) made up almost half of government revenue.
AI-driven job displacement would jeopardise government’s ability to provide public services, at just the time when many more people would become reliant on the state for benefit payments.
So, if an over-reliance on employment taxes risks hastening mass unemployment, what are the alternatives?
One option would be to tax AI directly. South Korea introduced the world’s first “robot tax” in 2017 in the form of a reduction in tax breaks for firms investing in automation infrastructure. A higher rate of VAT could be charged for technologies which threaten to displace jobs, or the government could tax the inputs for AI, such as the energy consumed by power-hungry data centres.
But defining which technologies count as job-displacing would be complex to administer and may disincentivise the uptake of tools that improve worker job satisfaction and productivity. Energy prices in the UK are already sky-high, and further taxes would affect households, not just businesses.
There is a simpler approach. If the adoption of AI reduces costs for businesses and drives up corporate profits, then revenue can be raised where it naturally accumulates.
Increasing VAT would capture some of the cost savings AI delivers to firms, with price inflation offset by lower marginal costs.
Increasing corporation and capital gains taxes would tap into the expected AI profit windfall.
Crucially, under this approach firms would be taxed at the same rate whether they use human labour or machines, removing the current labour market distortion.
If we want to go further and actively incentivise employment rather than simply level the playing field, government could introduce a progressive in-work tax credit funded by these higher VAT, corporation and capital gains taxes.
This would make hiring humans not just tax-neutral but actively advantageous, with the greatest benefit going to lower earners.
The timing of such a policy-shift is important. With the UK struggling for growth, the government is currently looking at AI to break the country out of its low productivity trap.
But assuming AI does deliver on the promised productivity gains then public policy must, at some point, shift to preserving employment.
Otherwise, Sadiq Khan’s warning of a metaphorical nuke to the job market might prove not to be hyperbole after all.
