Reforming the UK’s tax system by aligning the rates charged on different sources of income would improve equality and raise more revenue from wealthy individuals, according to a report by a leading think-tank.
Researchers at the Institute for Fiscal Studies found that the UK’s tax system was largely progressive, raising more tax from those with higher incomes.
But they added that differences in the way business income, capital gains and inheritance are taxed compared to employment income led to “horizontal inequity”. This is when different groups get similar returns for their work but are taxed at different rates.
The study found that in 2018-19 the top 1 per cent of adults paid 28 per cent of income tax and national insurance contributions combined, up from 25 per cent in 2009-10.
However, tax rates varied enormously within this group. The average tax rate for employees in the top 1 per cent was 42 per cent.
In comparison, people with their own companies paid an average of just 27 per cent because they took income in the form of capital gains, which is charged at a lower rate than income tax and NICs.
Meanwhile, those who held on to capital gains until death paid 0 per cent on the gains, under the existing system.
Business income, from either self-employment or owning and running a company, was found to be more common in the top 1 per cent and 0.1 per cent of earners, accounting for 21 per cent and 29 per cent, respectively. In comparison, business income represented just 9 per cent for the rest of the population.
Helen Miller, IFS deputy director and author of the report, said successive changes since 2010, such as the introduction of an additional tax rate charged at £150,000, had led to the system becoming more progressive. But she added that it was “striking” that the tax which people paid depended not just on how much income they had but on how they obtained it.
“Preferential rates on business income change how people choose to work…
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