As speculation grows over potential new taxes on wealth under a Labour government, new analysis from Rathbones, one of the UK's leading wealth and asset management groups, reveals the significant tax burden already borne by higher earners.
Using current income tax rates, Rathbones calculates that someone earning the median full-time salary of £39,039 would pay around £5,294 in income tax each year. By comparison, an individual earning £150,000 would pay £53,703.
In other words, a £150,000 earner receives 3.8 times the income of a median full-time worker, yet pays more than 10 times as much income tax.
Over four years, someone earning £150,000 would pay more than £214,800 in income tax — roughly the same amount of income tax a median full-time worker would pay over 40 years. The calculation* excludes National Insurance.
The pattern is evident further down the income scale. Rathbones estimates that someone earning £120,000 would pay around 7.45 times as much income tax as a median earner, while an individual earning £80,000 would pay approximately 3.67 times as much.
Jay Lawrence, Investment Director at Rathbones, says: “The UK has a highly progressive income tax system that relies heavily on a relatively small group of higher earners. At the same time, inflation and frozen tax thresholds have steadily chipped away at the real-world value of a six-figure salary. Many people are finding themselves pushed into higher tax bands without experiencing a corresponding improvement in their standard of living.
"This is particularly true for HENRYs — high earners, not rich yet. On paper, they may appear affluent, but many are balancing large mortgages, childcare costs, pension contributions and other financial commitments.”
Fiscal drag bites
The findings come as frozen tax thresholds continue to draw more workers into higher tax bands through fiscal drag. HMRC forecasts the number of higher-rate taxpayers will increase from 5.1 million to 7.7 million by 2026/27, while the number of additional-rate taxpayers is expected to rise from around 570,000 to 1.29 million.
The findings highlight the extent to which the UK's progressive income tax system - meaning those with higher incomes pay a larger share of their earnings in tax - relies on higher earners. According to HMRC*, the top 10% of income taxpayers contribute more than 60% of all income tax receipts, while the top 1% account for 29%.
Jay Lawrence says: "The rapid growth in the number of higher-rate taxpayers suggests that what was once considered a very high income is increasingly becoming part of the mainstream professional workforce."
Wealth tax concerns
Amid speculation about the potential introduction of a wealth tax, economic analysis conducted by Rathbones suggests that more than £100 billion of wealth could be diverted overseas or moved into less productive assets if such a tax were introduced in the UK.
The analysis also suggests a wealth tax could cost the government around £600 million to establish, while imposing ongoing compliance and administrative costs on taxpayers of £700 million a year or more.
Administrative complexity has been a key factor behind the abolition of wealth taxes in many countries and was one reason why the Labour government of the 1970s, despite pledging to introduce a wealth tax, ultimately did not proceed with one.
Jay Lawrence says: “Many of our clients are concerned that they could bear a growing share of the tax burden as the government looks to fund its spending commitments while operating within tight fiscal constraints.
"We have encountered highly paid professionals who are reviewing their long-term tax position, including the possibility of relocating to more tax-efficient jurisdictions, and the introduction of a wealth tax risks creating similar questions for entrepreneurs.
"If policies result in highly skilled workers, entrepreneurs and investors choosing to leave the UK, that risks undermining the government's broader objectives of boosting growth, attracting investment and improving the country's long-term economic prospects."
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