Top 10% earn average £98k as equality gap widens

A change in the way ONS calculates the income of the highest paid using tax data from HMRC has made the wealth gap worse  

Historically, the wealthiest earners have been the least likely to respond to ONS surveys which meant data on the richest tranche of society was sketchy.

The new method increases the estimate of incomes for the top 10% from £87,700 to £97,600 in 2017/18.

The income share of the richest 1% of people has remained fairly stable at around 7% since 2010, illustrating the fact that these part of society was immune to austerity measures since the financial crash in 2008.

The recalculation, based on more realistic top earner data, has created an even greater income equality divide, increasing it by 2.4% to an average of 34.8% between 2007/8 and 2017/8.

The reworking of the figures comes as the end of the tax year approaches on 5 April 2020 and with weeks to go until the first Budget since 2018.

Much trailed rumours about possible Budget measures include a clampdown on the generous pension tax reliefs available to those in the higher tax bracket. Pension relief is available at 40% for those earning over £50,000, for example, which is a costly benefit Treasury figures show that the total pension tax relief bill is £39.9bn a year.

Interestingly the revised £97,600 average salary for the top 1% also means many of these earners are teetering close to the watershed £100,000 net income figure, which creates a tax anomaly with an effective 60% tax rate for an element of earnings.

Alex Foster, tax partner at RSM said: ‘For individuals with net income in excess of £100,000 the personal allowance is restricted by £1 for each £2 worth of income.

‘This results in an effective rate of 60% on income between £100,000 and £125,000. There are ways of mitigating this by reducing taxable income to below £100,000 – for example, by making charitable donations under the gift aid scheme or personal pension contributions.’

There are also a number of allowances available to business owners and savers.

‘Some individuals have flexibility over their income and if possible, they can look to ensure that they are using the other allowances available to them. These include the dividend allowance (£2,000) and the personal savings allowance for basic and higher rate taxpayers only,’ added Foster.

‘ISAs provide valuable tax-free returns but they are subject to annual limits, which cannot be carried forward and so should be utilised each year where possible.’

Individuals can also realise chargeable capital gains of £12,000 in 2019/20 without paying capital gains tax (CGT).

‘Subject to investment considerations, individuals should consider whether they want to sell assets to realise gains to use this exemption,’ he said. ‘Alternatively, assets sitting at a loss could be sold in the current tax year to offset against gains.’

Another useful tax planning tool is to be generous as gifts up to £3,000 fall outside of the annual inheritance tax exemption as well as the seven-year rule. This can be carried forward one year and so if no gifts were made in 2018/19, a gift of £3,000 can be made this tax year with no IHT implications. Individuals can also make regular gifts to individuals that do not exceed £250 per person per annum.

The ONS overhaul of the calculation basis was jointly developed with the Department for Work and Pensions (DWP) and is designed to produce better estimates of the incomes of the highest paid people. This is part of wider plans to improve income and benefits statistics. This will be used for the first time in ONS’s Household Disposable Income and Inequality 2018/19 stats.

Report by Sara White


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