Myth busting: Do high-income earners pay more or less tax?
It’s a question that has split people’s opinion: do the highest earners pay enough in tax? Some argue that their extra contributions could fund greater changes in our communities, while others believe they shouldn’t be taxed more simply because they earn more. And some would even rather use their money to invest in communities themselves, removing the government as the middleman.
So in this hotly contested debate, what is the truth? We’re going to look into the British tax systems that are in place – or aren’t in place – and why people have such different views on the topic.
When it comes to income tax, the fact is, the rich actually pay quite a lot. In a recent year, the taxes came to a total of £174bn. £52.5bn of that tax – roughly a third – was paid by the 381,000 taxpayers who earn £150,000+ per annum. In fact, the top 1% pay 28% of all income tax.
But as the article above delves into, this is only on income. It doesn’t count wealth. The distinction here is money you earn through a PAYE workplace scheme is your income, whereas wealth will cover your assets, such as property. There’s a much bigger picture to consider. It’s also worth mentioning that richer people tend to use more loopholes, allowing them to save more of their money.
Inheritance tax is a one-time payment paid based on the value of the deceased’s estate, if that estate is over a certain threshold, which is currently set at £325,000. If the estate is valued over this threshold, the inheritance tax will be at 40%. And this is only applied on any amount over the threshold. If the estate’s value is below this threshold, there will be no tax.
Although most of the rich are technically self-made, there are still many wealthy people who have, wholly or partially, inherited their wealth. Inheritance tax is its own debate altogether, with many against the idea. Again, there are ways to avoid this. Inheritance tax isn’t paid if everything is left to a spouse. Or you could give some of your wealth away to loved ones before your death. But you have to be alive for many years after giving it away. It’s also something you need to think about if you own a business.
Some also cast a side-eye to the high-earners when it comes to council tax. Council tax has an incredibly low maximum tax charge. The perfect example of this in action is the case of a £17m mansion in Westminster paying just £1,376 for the year 2017-18. With the rich sometimes paying less council tax than the working man, it’s easy to see why many believe the rich should be taxed more.
Land valuation tax is a tax that’s applied to both residential property and business premises, based on the value of the premises/house, including the land. Unlike council tax, LVT is paid by the landowner, not the tenant, and is paid regardless of whether or not the land is developed. The UK does not have this tax. The value of land in the UK has risen by 544% since 1995. With such rapid value increase, many are sitting on undeveloped land waiting for its value to further increase. LVT would disincentive this practice.
In reality, the amount of tax paid will differ from person to person. Some high-net-worth individuals will be more than happy to pay their way, while others will do all they can to save as much as possible. So should high-earners pay more tax? Well that’s up to you.
Taxes can be confusing. A Big Hand, we’re expert accountants and business consultants, eager to help your business be the best it can be. Get in touch with us now on 0161 327 2911.