Who’s really paying the 40p tax rate?
The 40p rate of tax (the higher rate) has been in the news a lot ahead of the budget – some business groups are calling either for a cut in the rate or an increase in the threshold for paying it.
George Osborne was also criticised yesterday for reports that he said that a positive result of people paying the 40p rate was that they would feel successful.
When Nigel Lawson brought in the 40p income tax rate in 1988, it applied to earnings of higher than £19,300: the threshold has risen by far less than wage growth since, and actually dropped in nominal terms in recent years.
According to the Annual Survey of Hours and Earnings (ASHE)*, the UK’s most comprehensive breakdown of incomes, the 40p rate still doesn’t apply to any incomes below around the 80th percentile – middle incomes in the literal sense aren’t covered by the tax.
But this seems a little unfair, since the average is an aggregate of many age groups – most people see their salaries rise slowly over much of their working life – so what does the distribution look like for people of different ages, in different deciles of income?
Between 20-29, even the highest income decile doesn’t reach the threshold for the higher rate – so very few young people are being hit.
But by the time 40-49 age bracket is reached, the top 25 per cent of earners are paying some tax in to bracket – workers at the 75th percentile had an income of around £100 more than the basic rate band (which is not visible in the graph).
By the 90th percentile, people at their peak wage-earning age are making more than £17,000 for which the higher rate is applicable. The numbers drop off again after 49, when wages start to decline slightly. By the 60+ age group, only the highest decile is hit by the 40p rate.
So there are relatively significant age differences – but that isn’t where the biggest variation lies. The data is most distinctly different when broken down by region.
In Wales, even the top ten per cent of incomes barely reach the higher rate of tax. The story is the same in Yorkshire, Northern Ireland, the South West, North East, West Midlands and East Midlands, where the highest income bracket pays less than £5,000 of their income at the higher rate.
As is often the case, the distant outlier is London – the top three deciles pay the tax on at least some of their income, and the top 10 per cent pay nearly half of their income at the rate. The south east pays slightly more than other regions, but in terms of the number of people paying the higher rate, and the amount paid by the highest earners, London takes the top spot by some distance.
*All data comes from the 2012 ASHE results, for which there are now revised results. The tax brackets used are for the 2013-14 financial year, and the brackets will be altered from April.