Analysis of data on the 540,000 wealthiest individuals in the UK – the top 1% – shows how decades of low taxes on capital gains, a type of income mainly available to the wealthiest in society, is creating a new breed of “super-gainers”.
Under the current system, income – which covers earnings such as salaries – is taxed at a maximum rate of 45%. Capital gains – the profit made when an asset such as shares or property is sold for more than it cost to acquire – is taxed at much lower rates. Gains from shares attract a maximum rate of 20%, while the maximum for property is 28%.
The analysis has found that since the late 1990s, the proportion of earnings that are declared as capital gains by the top 1% has ballooned: just 3% of their income came through gains in 1997, doubling to 5.4% in 2010. By the 2017/18 tax year it had reached 13.3%.
Among the extremely rich – the 50,000 people who make up the 0.1% – the amount declared in capital gains grew by 213% between 2007 and 2017.
They found this type of income was very concentrated at the top, with the 5,000 highest earners receiving 54% of all capital gains.
Because gains are so lightly taxed, the wealthiest pay a far lower share of their earnings to the tax authorities than most workers. The top 0.001% – 400 people with earnings of between £9m and £11m – were paying an effective tax rate of just 21%, Advani found. This was slightly less than someone on median earnings of £30,000, whose effective rate was 21.4%.
Adam Corlett, the principal economist at the Resolution Foundation, said there were “glaring holes” around capital gains which needed to be addressed. “Thanks to the glaring holes in the capital gains tax system, it’s quite possible for the wealthiest to pay a tax rate of only 10%, or even zero, while low income workers pay much higher rates. That should change,” he said.
The government could raise an extra £16bn a year if the low tax rates on profits from shares and property were increased and brought back into line with taxes on salaries.