The wealthiest taxpayers are predominantly male and middle aged, with those living in London earning income of over £700,000 a year, which places them in the top 300,000 earners in the UK, according to analysis by the Institute of Fiscal Studies
To be counted in the top 1% of earners, UK-wide taxpayers had to take home in excess of £150,000 and there were only 310,000 of those people across the country as a whole in 2014-15, the period analysed by the Institute of Fiscal Studies (IFS) report.
But the stark gap between the richest and the rest is in far greater in London where more than half of the top 1% of earners reside.
To be in the top 1% in London, people had to earn over £700,000 a year but they did pay a substantial share of the total tax bill, accounting for 27% of all income tax.
The uber-rich represent only 0.1% of taxpayers and this group of around 230,000 individuals enjoy pre-tax incomes in excess of £650,000 a year across the country as whole, while to be at the top of the pile in London requires £1m plus earnings. Inevitably this elite group is dominated by men with only 11% being women, and over 40% were aged between 45 and 54.
Taxpayers with a pre-tax income of just over £50,000, where the higher rate 40% tax bracket kicks in, represent 10% of income taxpayers.
To be in the top 1% of income taxpayers in London requires an income of over £300,000 a year. The threshold for the top 1% in Wales, the north east and Northern Ireland is around £100,000.
Robert Joyce, deputy director at the IFS and an author of the report, said: ‘The highest income people are very over-represented in the country’s south east corner, most of them are men, and many are in their 40s and 50s.
‘This geographic and demographic concentration may be one reason why many of those on high incomes do not realise quite how much higher their incomes are than the average. The sheer scale of the gap between the top 1% and the top 0.1% may also help explain that.
‘What many people will want to know is how some people have such high incomes. For example, do those earning hundreds of thousands of pounds a year derive such rewards from innovations and activities that benefit all of us, or are they exploiting market power at the expense of workers on lower incomes?’
The wealth gap has worsened significantly since the early 1980s, when the share of national income accounted for by the top 1% of adults accounted for 6.5%; today that same figure is 14% from only 310,000 people, IFS said.
Nearly half (43%) of adults paid no income tax over the period reviewed as they earned less than the annual tax-free allowance of £10,000 in 2014-15. The allowance has now risen to £12.500, potentially taking even more people out of tax as wages are squeezed. In total, 31m of the 54m adults in the UK paid income tax in the 2014-15 tax year.
On the societal disparity and wealth gap, the IFS report said: ‘This share increased significantly in the 1980s as overall inequality increased, but the group pulled further away from the rest throughout the 1990s and most of the 2000s (until the financial crisis), even though income inequality across most of the population was actually stable or falling over that period,’ the IFS report stated.
Staying in the 1% bracket is difficult in the long term - IFS analysis shows that only one in four people in the top 1% in one year will be there within a year, while only half will manage to stay in this bracket over a five-year period.
There also remains a huge gender disparity at the top of the income distribution. Men make up 83% of the top 1% of income taxpayers and 89% of the top 0.1%. To be among the top 1% of men requires an income of £200,000, while to be among the top 1% of women requires an income of half that at £100,000.
Women may only make up about 17% of the top 1% today, but that share has risen from 12% back in 2000-01.
Around one in three of the top 1% are business owners (they account for around one in five of the work force overall), including 14% of the top 1% who are partners (disproportionately in hedge funds, law firms, accounting firms and the medical industry).
Well over a third of the income of the top 0.1% comes from partnership and dividend income and over a quarter of the total income of the top 1%, a much higher share than for those with lower incomes. Around 18% of the top 1% are involved in partnerships, compared with 60% in employment.
High income partners tend to be based in a small number of sectors in the economy: 85% of those in the top 1% who get most of their income from partnerships are based in financial and professional services, including accounting and law firms, for example.
Business owners and partners also paid less tax than employees. This gave substantial tax advantages to some of the very highest-income people in society, something which the government has attempted to address with a number of cuts to the tax breaks on dividends by reducing the dividend tax-fee amount from a one-time £10,000 to today’s fixed dividend allowance of £2,000 per annum.
The OTS report pointed out that ‘owner-managers pay personal tax on income only when it is withdrawn. By keeping income inside the company wrapper until the company is sold or dissolved, and then taking the income out in the form of capital gains at that point, the owner-manager could benefit from entrepreneurs’ relief – a lower 10% rate of capital gains for business owners – compared with a dividend tax rate of 38.1% above the additional-rate threshold (£150,000). Evidence from tax data suggests that this is a strategy employed by a significant share of high-income owner-managers.’
Sara White | 05-08-2019
IFS Briefing Note BN254, The characteristics and incomes of the top 1%, by Robert Joyce, Thomas Pope and Barra Roantree, published 6 Aug 2019. The IFS analysis used HMRC administrative data and was co-funded by the TARC and ESRC, based on 2014-15 figures.