A recent poll by the UK's Fairness Foundation found that 78% of people think that high net worth individuals are not paying their fair share of tax. This comes shortly after reports that the tax burden on individuals is currently on course to reach its highest point since World War II, says Sharlene Rowley and Rachel de Souza in RSM's weekly briefing notes.
Our current income tax system means that taxpayers whose income is below a threshold of £12,570 generally pay no tax on their income. Where income is higher, tax is then applied at a range of rates, starting at 20% and rising to 45% for most income in England, Wales and Northern Ireland. In addition, once income reaches £100,000, the amount of personal allowance tapers away at a rate of £1 for every £2 of income over the threshold.
The system is designed so that the lowest paid individuals pay no income tax and the highest paid, pay more. This is also borne out by statistics published by the government in January 2023, which found that the top 1% of earners accounted for almost 30% of total income tax receipts in 2019/20 when their income only represented around 12.5% of all income. Clearly, the highest earners are paying a substantial amount of their income in tax, but is it ‘fair'?
You would expect an unskilled worker receiving a salary of £15,000 to pay a much lower rate of tax than a senior executive earning £1m. Under the current tax system, looking at income tax alone, the unskilled worker will pay income tax at effectively around 3% of their salary, whereas the senior executive will pay income tax equal to around 44% of their salary.
The government has notably taken steps to ensure the higher earners bear more of the tax burden, including the introduction of measures to remove the personal allowance for those earning over £100,000 and a reduction in the 45% tax rate threshold from £150,000 to £125,140.
Where is the tipping point between what is fair and what is not, and what level of income means that you are higher paid? There are no clear-cut answers to these questions and the answers likely depend on who you ask and what measures are being used. Also, the question cannot be addressed solely by looking at income tax, as other taxes, such as national insurance contributions and capital gains tax, also contribute to the tax burden for individuals.
Anecdotally, lower paid individuals may not want to pay more tax and so they may say it should be the higher paid who should pay more. However, higher paid individuals may say, you are already taking nearly half my income in tax and so I am already paying my fair share.
The reality is that there is no simple answer. It's one for the policymakers to decide, but maybe we should move away from commenting on what's fair in tax, as what's fair to one is unfair to another.
