According to research from a leading think tank that shows the effect of ‘unfair’ tax rates available to business owners, the top 0.1% earners in the UK have higher annual earnings at £500,000.
More than 50,000 people in the top income bracket account for 6% of all income, 60 times their share of the population, the Institute for Fiscal Studies said in a report covering the 10 years to 2019. It showed that more than half of the richest 1% of adults lived in London and the South East, while nearly 60% were aged between 45 and 64 and just a fifth were women.
The report, Top Income Inequality and Tax Policy, shows that income from self-employment and business ownership was much greater for those at the top than for those with low or middle incomes.
Suggesting that this has implications for inequality, as income from business property is taxed at a lower rate than income from work, the report argues that reforms could be launched to address inequities in the tax system.
Alex Beer, welfare program manager at the Nuffield Foundation, which funded research as part of the IFS Deaton review of inequality, said: “The current design of the tax system, including how different forms income are taxed at different rates, is unfair and inefficient, penalizing workers and distorting investment decisions, to the detriment of social welfare.
According to the report, business income – whether from self-employment or owning and running a business – accounts for 21% of total income for the top 1% of adults and 29 % for the richest 0.1%, compared to only 9% for the rest of the general population.
He said business owner-managers could effectively choose to withdraw income from their business in the form of salary, dividends or capital gains, which would allow them to benefit from reduced tax rates.
The report highlighted a preferential rate of 10% capital gains tax, called relief for the disposal of business assets, while indicating that business owner-managers could access tax rates of only 27% on income received in the form of capital gains.
In comparison, the average tax rate for employees of the richest 1% is 42%. The government sets the basic rate of income tax at 20% on income above the tax-free personal allowance of £12,571, up to £50,270, with a rate of 40% on income above £50,271 and 45% above £150,000.
Despite the lower rates open to business owners, the IFS said tax on top earners has risen since 2010. As a result, the share of overall after-tax income in the UK received by top earners revenues fell from 14% in 2009-10 to 11% in 2018-19.
Illustrating the gap between public and private sector salaries at senior levels, the Taxpayers Alliance said in a report earlier this week that only 2,921 people employed by local authorities in 2020-21 received more than £100,000 of total pay and 739 received over £150,000. , 46 more than the previous year.
According to the Institute for Government, only 1,560 of 456,410 civil servants earned more than £100,000 in 2020. Across the civil service the majority of staff (55%) were paid below £30,000.