Susan Ball

Written by: Susan Ball

Susan Ball

Partner

Tax extremes: number of people paying no tax or top-rate tax both increase

Income tax is the single largest source of Government revenue, accounting for £193bn or more than a quarter of the total collected. Analysis of HMRC records by the Institute of Fiscal Studies (IFS) showed that 43 per cent of adults do not pay income tax, up from 38 per cent in 2010. However, the top 1 per cent of earners (those earning £160,000 and over, around 300,000 earners) are now paying 27 per cent of the total raised in income tax. With the greatest concentration of top earners in London and the south-east, tax revenues and hence the funding of our public services and welfare system, are very sensitive to a relatively small group of people based in London.

From data produced in 2018, 9.4 per cent of employee jobs in London were low-paid, compared with an average of 19.3 per cent in the rest of the UK. Similarly, London has nearly twice the proportion of high-paid jobs as the rest of the UK (43.1 per cent compared with an average of 22.5 per cent, respectively). Managers, directors and senior officials and professional occupations have the largest proportions of high-paid employees (54.8 per cent and 57.3 per cent respectively).

As the IFS pointed out, the numbers liable for higher income tax has grown, from about one and a half million in the early 1990s to well over four million today. So, we have seen an increase in those paying higher rates and an increase in those not paying tax at all.  

If Boris Johnson comes good on his pledge, the point at which people start to pay the higher 40 per cent will increase from £50,000 to £80,000. This suggests an increase in taxes elsewhere in order to pay for it. 

Could we therefore end up with the budget later this year which introduced an extra, higher rate band (more than 45 per cent) for taxpayers in England, Wales and Northern Ireland? Or perhaps rates might be tweaked along the lines of the Scottish system at 19 per cent, 21 per cent, 41 per cent and 46 per cent? 

The problem is that we are already seeing those paying the highest rates moving, as they can afford to do so. In the UK’s tech industry recent research by Boston Consulting Group and Totaljobs found the majority of employees were prepared to relocate. 

The example of non-doms is also relevant. Last year there were 78,000 non-domiciled taxpayers in Britain, down from 98,500 the year earlier, figures showed. The fall meant the tax paid into UK coffers by so-called non-doms fell from £9.5bn to £7.5bn last year.

This would suggest that if the Chancellor increases the tax rates for higher earnings, we are likely to see those higher earners relocating with further reductions in tax collected. The new Chancellor Sajid Javid has some difficult decisions to make ahead of the Budget later this year.

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