Super-wealthy pay super-low tax while the Government robs charities. Nice.
It’s a hard life being a multi-millionaire. If it wasn’t tough enough thinking of ways to spend all that lovely cash, you also have to spend ages working out how to pay as little tax as possible. New Treasury figures have revealed that of the very top earners in the UK, 6% pay less than 10% in income tax, with a further 23% paying an average rate of tax of less than 40%.
Of course, this is an average tax rate, not marginal (highest) rate of tax paid, so the average rate of a standard higher rate tax payer earning, say, £50k will not be 40%. However, it will probably be a darned site higher than 10%*. In fact, the average rate for someone earning over £10m should be 49.78%
The full set of figures released by the Treasury are detailed below, and these show that the very highest earners are also the ones avoiding most of the tax- where incomes fall between £500k and £10m a higher proportion (over 80%) of taxpayers cough up over 40% in tax. As has ever been the case, it it those with the most money, and the most to lose in tax, that are largely the only ones who can afford the complicated tax planning required to substantially reduce their chargeable income.
A Treasury spokeswoman said: "There are currently millionaires paying a lower tax rate than ordinary taxpayers. This is the system we have at the moment, but the Government is committed to making it fairer. We're capping benefits and these figures clearly show why it's fair to cap tax reliefs for the wealthy as well."
So, given these figures show the huge financial cost of the super-wealthy’s tax avoidance, why would the Treasury choose to make these figures public? There are two reasons- the recent Budget outlined proposals for a new cap on tax reliefs to prevent more than 25% of income being relieved from tax (excluding pension contribution relief and ES relief), so they are proving there is a problem that they are already solving. The second reason is to try and fight the backlash against a certain application of the proposed new rule.
One way in which tax liabilities can legitimately be reduced is through charitable giving. Under the Gift Aid system, donations made to charities are assumed to be made net of basic rate (20%) tax. A basic rate donor simply makes their donation, and the charity can reclaim 20% of the grossed up value (works out at 28p per £1) directly from HMRC.
However, if you are a higher rate taxpayer, the difference between the basic rate relief claimed by the charity and the highest rate of tax you pay, which could be the 50% rate of tax, can be claimed as a deduction on a tax return. It’s a win win win situation- the charity gets money from the donor and the taxman, the donor gets additional tax relief and HMRC forks out twice.
However, this new 25% cap on reliefs will also apply to charitable donations where gift aid is claimed. Which means that certain charities favoured by wealthy benefactors could find themselves short of a few bob.
These Treasury figures are meant to show that the Goverment aren’t evil overlords stealing money from charities, they are merely evil overlords trying to minimise tax avoidance. But this is proving a difficult sell for them. Chancellor George has already indicated he might ‘negotiate’ on the effect of the cap for charities, and a recent poll by ComRes found that out of 71 coalition MPs asked, 46 agreed that charity donations should not be subject to the new limit, 10 refused to express any kind of opinion, and only 15 supported their own Government’s policy.
And is it actually a goer? Tax avoidance isn’t really that “morally reprehensible” if avoiders are only getting back a percentage of what they have genuinely donated to charity surely? Is it right that the Government is banking on clawing back "£50m-£100m"** of money from Gift Aid donations that will not be made in 2016/17 in order to prop up their failing coffers?
* it actually works out at a neat 20%, in case you are interested.
** Treasury secretary David Gauke on the BBC Radio 4 Today Programme.