Publications that covered this story include the Financial Times and Daily Mail on 2 June 2018.
- Rise driven by reductions in pension tax relief which has exposed high earners
The amount of income tax paid by higher rate taxpayers (individuals earning £150k+) has increased 9% in just one year to £54.3bn, up from £50bn in 2016/17, our research shows.
Meanwhile, the amount of tax paid by individuals earning less than £150k has increased just 1% to £123.3bn, up from £122bn the year before.
The rise in the amount of income tax paid by higher rate taxpayers has been driven by the reduction in pension tax reliefs in 2016 – sharply increasing their tax payments. Many higher rate taxpayers had used the reliefs to reduce their income tax liabilities.
Since 2016, the Annual Allowance has been tapered so that for every £2 of adjusted income earned above £150k, the Annual Allowance is reduced by £1. As a result, the Annual Allowance could be reduced from £40k to £10k in some cases.
The Annual Allowance is the maximum amount that can be contributed to a pension that benefits from tax relief.
The rise may also partly be result of fiscal drag which occurs when income tax brackets do not move with inflation. This causes more individuals to fall into upper tax brackets, increasing overall tax payments.
Recent research* found that while inflation has increased 26% since 2008, the higher-rate tax threshold has only risen 13.5% over the same period. As a result, nearly five million taxpayers have been pulled into paying the 40% or 45% tax rate that would not have been otherwise.
Clive Gawthorpe, partner at our Manchester office, says: “The Government appears to be quietly adding to the tax burden shouldered by high earners.”
“Higher earners have been hit hard by cuts to pension tax reliefs, which have been widely used as a tool to reduce income tax liabilities, and this combined with fiscal drag is proving a potent mix.”
“Many higher rate taxpayers also tend to be footloose, internationally mobile people and some commentators have argued that too high a tax burden could cause them to relocate to another country. In time, this could reduce income tax receipts and act as a drag on the UK economy.”
*Ascot Lloyd, 2018. Inflation measured using CPI
