The government is missing out on up to £20bn a year in tax from the UK’s richest individuals, because of the failure to tax all income and capital gains at the same rate as earnings, according to academic research
A study by the University of Warwick and the London School of Economics and Political Science analysed the anonymised personal tax returns of every UK resident who received more than £100,000 a year in income or capital gains.
The findings indicate many are paying extremely low tax rates, lower even than people on modest incomes, due to the way the tax system is designed rather than any attempts at avoidance or evasion.
The research focused on people’s ‘effective’ average tax rates, i.e. the total tax they pay as a percentage of the total remuneration (taxable income and capital gains) that they receive.
The research team said the difference between the headline rate and the effective rate is due to the much lower tax rates on dividends and capital gains, as well as deductions and reliefs.
The report stated: ‘A substantial minority of the UK’s richest individuals – mainly investors and business owners – paid extremely low effective rates: much lower than others at the same level of remuneration, and lower even than people on modest earnings.’
The study found the average person with more than £2m in taxable income had an effective average tax rate (EATR) of 40%, which for someone at £2m represented a tax saving of £140,000.
The average person with £10m in taxable income and capital gains had an effective tax rate of 21%, which is less than the rate that would be paid by someone on median earnings of £30,000.
Effective tax rates vary considerably among the richest, the research indicated. One in four receiving above £100,000 paid the headline rate on earnings of up to 47%, but one in ten people with total remuneration over £1m paid just 11%, which represents a lower EATR than someone earning £15,000.
The report said up to £20bn a year could be raised from taxing all income and capital gains at the same rate as earnings.
It proposed an ‘alternative minimum tax’ rate (ATM), which would require everyone earning more than £100,000 to pay at least a 35% tax rate on their income and gains. It claims would raise around £11bn from those best able to afford it, without raising taxes on those who already pay the highest shares, and whilst minimising the scope for avoidance.
Dr Arun Advani, assistant professor at the University of Warwick’s economics department and CAGE Research Centre, said: ‘In the current climate, there is – rightly – a debate about how to raise tax revenues, and about what proportion should be contributed by the rich.
“It is important to realise that raising money from the rich doesn't require increasing headline tax rates. Many of the richest pay far less than the top rate.
‘An ATM of 35% on remuneration above £100,000 would raise as much money as adding 2p to the basic rate, and be concentrated only on the rich who pay the least.’
Dr Andy Summers, assistant professor at LSE’s law department and International Inequalities Institute, said: ‘Rather than pointing the finger at individuals paying extremely low rates of tax, we need to ask politicians to change the structures that allow this to happen.
‘Our findings are driven by two main policies: first, similar forms of remuneration are currently taxed at very different rates; and second, a raft of generous tax reliefs are made available without taking adequate steps to check their effectiveness. T
‘The government should look again at both of these policies to raise more revenue and make the tax system fairer.’
By Pat Sweet