The top 1% of earners in the UK now account for more than a third of income tax paid to the government, following changes over the past decade that have left almost half the population exempt from making payments.
In research underlining the dual nature of Britain’s income tax structure, the Institute for Fiscal Studies said above-inflation increases in the personal allowance to £12,500 a year meant 42% of adults paid no income tax.
The thinktank said the top 1% of all adults accounted for well over a third of income tax, adding that the tax and benefit system was progressive.
Meanwhile, the share of income tax paid by the top 1% of taxpayers – a smaller slice of the population because so many people pay no income tax – has risen from 24% of the total in 2007-08 on the eve of the financial crisis to 30% currently.
“Unlike the increases in previous decades, this has not been driven by a rising income share at the top,” the thinktank said in a briefing paper. “Rather, it reflects policy reforms: there have been income tax rises for high-income individuals (the additional rate of income tax above £150,000, the withdrawal of the personal allowance above £100,000, substantial cuts in income tax relief for pension contributions, and a net real reduction in the higher-rate threshold), even while increases in the personal allowance have reduced or eliminated income tax for those with lower incomes.”
Before taxes and benefits were taken into account, the highest 20% of earners had incomes that were 12 times as high as the poorest fifth of the population. After the inclusion of cash benefits and the deduction of the main personal taxes – income tax, employee and employer NICs and council tax – the ratio came down to five, the IFS said. Benefits accounted for about 80% of the reduction, while direct taxes accounted for 20%.
Britain’s overall tax take – revenues as a share of annual national income – stood at 34.4%, its highest sustained level since it was on its way down from the high levels seen during the second world war. Even so, taxes in the UK were below average for the G7 group of industrial nations and lower than in most countries in western Europe.
Other countries typically raised more from social security contributions and less from property taxes, the IFS said. It noted that average, rather than top earnings, would be taxed markedly more if the UK adopted the tax system of a typical higher-tax country.
The IFS said despite three big tax giveaways – raising the personal allowance, cutting corporation tax and freezing fuel duties – increases in VAT and national insurance contributions had increased tax revenue by about £20bn.
Stuart Adam, a senior research economist at the IFS, said: “Taxes in the UK are not high by international standards but they are high by historical standards. And our tax revenues are ever more reliant on a small group of high-income taxpayers.”
