HMRC reveal a small majority of people are soldiering a significant proportion of income and capital gains tax, following FOI request. Data has reignited the debate on whether a wealth tax is necessary
Almost a quarter of all income and capital gains tax in the UK is paid by just 100,000 taxpayers, according to a new Freedom of Information Act request published by HMRC.
These individuals, representing a mere 0.3% of the total number of taxpayers, have shouldered an average income and capital gains tax bill of £559,000 each in the tax year 2021/22. This figure marks an 18% increase from the previous year, according to the FOI.
While some argue that the wealthy fail to pay their fair share of tax, these figures appear to debunk such claims.
Alex Davies, the founder of Wealth Club, emphasises the importance of recognising the substantial contribution made by this group and urges politicians to tread carefully when formulating tax policies.
The mobility of the wealthy will be a key consideration for the UK Conservative Party as it looks to re-election in 2024. Should the top 100 taxpayers relocate, it would result in a significant £4.6 billion reduction in tax receipts – the departure of the top 1,000 taxpayers would also leave a gaping £11.5 billion hole in the country’s finances.
“The wealthy are a mobile bunch, proven by the fact that an estimated 3,200 millionaires are expected to leave the UK this year,” said Davies.
The concentration of tax contributions among the top 100,000 taxpayers has reignited discussions about the fairness and effectiveness of the UK tax system.
The question of who should bear the burden of rebuilding public finances has become increasingly pertinent in the wake of the COVID-19 pandemic.
As politicians grapple with the widening cracks in the social fabric and the exacerbation of prior inequalities, tax rises appear inevitable.
While the top one percent contributes 30% of all income tax revenues, the actual rates paid by this group vary considerably. The majority of revenue from the top one percent is derived from high-earning employees subject to the top rate of 45% income tax and two percent national insurance contributions.
However, a significant minority pays much lower rates, particularly when considering capital gains, which are taxed at lower rates than income from work.
The source of income plays a crucial role in determining the tax rates paid by the wealthy. Investment income and capital gains, for example, are taxed at lower rates than income from employment. This distinction leads to varying tax liabilities among the top earners.
An analysis of anonymised data from personal tax returns in 2015-16 reveals that individuals receiving one million pounds in taxable income and gains paid an average tax rate of 35%. However, one in four paid the top rate of 45%, while another quarter paid less than 30% overall. A further tenth paid just 11%, equivalent to someone earning £15,000.
The lower rates paid by some wealthy individuals are not the result of complex tax avoidance schemes but rather a consequence of the design of the tax system. The differential treatment of income sources allows for lower tax liabilities, particularly for those with investment income and capital gains.
To address the disparities in tax rates among the wealthy, the implementation of an alternative minimum tax has been proposed. This tax would set a floor on the lowest tax rates, ensuring a more equitable distribution of tax burden. For example, setting the alternative minimum tax at 35% on taxable income and gains for individuals earning over £100,000 per year could raise £11 billion annually.
The advantage of an alternative minimum tax is its targeted approach, focusing on individuals currently paying the lowest shares of tax. Instead of increasing taxes for everyone on high incomes, this proposal specifically addresses the issue of low tax rates paid by some wealthy individuals.
However, it is important to consider that this approach may not capture individuals who report low income and gains despite possessing significant wealth, such as business owners who retain profits within their company or individuals whose wealth is held in non-income-producing assets.
