Recession and higher tax taking toll on Britain’s top earners

 
Allister Heath
The rich are getting poorer. Yes, you read that right. The top one per cent of income taxpayers – an individual needs to earn £150,000 per year to qualify – will account for 11.7 per cent of total taxable income this year, down from 12.2 per cent in 2011-12. Their income share peaked at 13.9 per cent in 2009-10, and is now only slightly higher than it was in the early 2000s.

There seem to be a number of reasons for this, starting with the poor economy and the crisis in the City. Higher taxes have moved some economic activity and jobs abroad. There is also a reduced incentive for people to declare income, and a greater incentive for them to delay it – so-called forestalling – until the top rate falls to 45 per cent in April.

The top half of taxpayers’ share of pre-tax earnings has dropped from a record of 77.9 per cent in 2007-08 to 75.8 per cent, while the bottom half has increased its share from 22.1 per cent to 24.2 per cent, its highest since at least the 1990s. One partial reason may be that there are fewer taxpayers – down to 29.9m this year from 32.5m in 2007-08, as the zero-taxed threshold has gone up drastically – which has biased the figures by removing many low paid workers.

But these fascinating shifts, all revealed in updated estimates from HMRC, destroy a great myth – the idea that only the poor have suffered and that the rich have continued to do well. It is, as ever, much more complicated. In after-tax terms, which ultimately is the only variable that matters, the top one per cent’s share has fallen precipitously – from 11.2 per cent in 2009-10 to seven per cent in 2012-13 – as a result of a spate of tax hikes and is now the lowest of any time in recent history.

This continues as one goes down the income distribution: the top five per cent are down from 22.5 per cent in 2007-08 to 16 per cent this year; the top 10 per cent from 31.8 per cent to 23.6 per cent and the top 50 per cent from 75.2 per cent to 60 per cent.

These are massive drops, so large that one suspects that some will eventually be revised. It is bad news for the Tory party that one chunk of their natural supporters – those on higher than average incomes – are being squeezed.

Another problem is that George Osborne’s policies mean that the number of 40p and 50p taxpayers will hit 4.127m this year, 13.8 per cent of the total, as a result of the lowering of the threshold to compensate for the higher personal allowance. These folk ­ will pay 61.3 per cent of all income tax, up from 54.2 per cent in 2010-11.

Those on the very highest incomes continue to contribute disproportionately to direct taxation. The top one per cent will pay 26.5 per cent of income tax this year, down on last year’s 27.4 per cent but still the second highest ever. The 299,000 who earn £150k – up from 284,000 last year – will hand over £152,000 on average, 40.8 per cent of their incomes.

The 13,000 people who earn £1m+ will pay £12.31bn in income tax. This is down substantially from last year’s £13.88bn, as their taxable income is expected to slump from £30.8bn in 2011-12 to £27.4bn in 2012-13, partly because of reduced bonuses and partly because of forestalling, in itself a hugely important story which demonstrates that the chancellor was silly to announce his tax cut so long in advance. Yet the tax take of those on £1m+ remains only marginally lower than the £13.93bn handed over by the 13.68m taxpayers (and millions more under the personal allowance) who earn £20k or less. Like with everything else in British politics, it is time for a few more facts and a little less grandstanding from a position of abject ignorance.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath