07/04/22

UK: Country Urged to Overhaul Tax System That Favors Highest-Earning 1%.

As published on bloomberg.com, Thursday 7 April, 2022.

The U.K. tax system continues to favor the 500,000 highest-earning people in the country and should be overhauled, according to the Institute for Fiscal Studies.

The top 1% enjoy “preferential” rates over wage earners because they get more of their income from more lightly taxed sources, the influential think tank said in a report published Thursday.

For the richest 1%, a fifth of their income comes from self-employment or from their own companies, the IFS said. For the top 0.1%, a group of just 50,000 individuals, the figure is as high as 30%.

It means that deep inequalities still persist, even though taxes on the rich have risen since the financial crisis. The IFS said there is now a case for aligning tax rates across all sources to tackle “inequitable” income shifting, coupled with reform of the tax base so that higher levies on self-employment profits, dividends and capital gains don’t discourage investment.

The report, part of the IFS Deaton Review of Inequalities launched in 2019, comes amid a growing focus on the richest and how much tax they pay as Britain braces for brutal cost of living crisis that is set to fall hardest on the poorest.

“The current design of the tax system, including the way in which different forms of income are taxed at different tax rates, is unfair and inefficient, penalizing employees and distorting investment decisions, to the detriment of social well-being,” said Alex Beer, welfare program head at the Nuffield Foundation, which is funding the review.

The analysis also found that:

• The highest-earning 1% of adults have incomes above 130,000 pounds ($170,000)
• The top 0.1% had incomes in excess of 500,000 pounds and accounted for 6% of all incomes
• 55% of the top 1% live in London and South East England, and just 20% are women compared with 15% in 2003-04
• Within the top 1%, the average tax rate for wage earners was 49%. That compares with 42% for the self-employed and 45% for company owner-managers. Company owner-managers can access a rate of just 27% on up to 1 million pounds of income retained in their company
• The share of after-tax income received by the top 1% has fallen from 14% in 2009-10 to 11% in 2018-19