A detailed study of HM Revenue & Customs says that wealthy Britons pay much less tax on earnings than official headline rates due to discrepancies in the system, amounting to £20 bn in lost revenue to the exchequer. The study looks into the tax rates paid by individuals who received more than £100,000 a year in taxable income, including capital gains.
The study by academics at Warwick university and the London School of Economics used data from 40mn self-assessment returns, which found a big mismatch between the statutory headline tax rates and the reality of what wealthier people paid. A substantial minority of the UK’s richest individuals were found to have paid tax much lower than others with similar remuneration, and lower even than people on modest incomes.
“If most rich people paid tax at the headline rates on earnings, we would see effective average tax rates rising with remuneration. But instead among the UK’s richest individuals, we find a very different pattern,” said Arun Advani, assistant professor at the University of Warwick, and Andy Summers, assistant professor at the LSE’s International Inequalities Institute, who wrote the report.
People earning more than £2mn face a headline rate of 47 per cent but the study found on average they were paying tax at 40 per cent, representing a saving of £140,000. A similar pattern emerged when the researchers included taxable gains as well as income and led them to conclude that above £250,000 the personal tax system becomes “regressive.” Someone with both taxable income and gains worth £10m annually paid an effective tax rate of just 21 per cent, the study found, below the rate that would be paid by a person on median earnings of £30,000. There was also a great deal of variation in the actual rate of tax paid on earnings by wealthy people with similar incomes. A quarter of those with income above £4mn paid just 31 per cent; the same effective average tax rate as someone earning £70,000.
The authors stressed that individual taxpayers should not be blamed for the discrepancies, which are primarily due to the different way income and gains are taxed rather than avoidance schemes or bad behaviour. Deductions available from various tax reliefs also have a big impact on tax paid. The findings come as the government is looking at tax-raising measures, as the economic cost of tackling the coronavirus pandemic mounts.
