Analysis of tax returns reveals inequality is higher than thought

The very richest are benefiting from lower tax rates to an extent not previously realised, meaning inequality in the UK is higher than thought.

An analysis of the tax returns filed by some of the richest people in the country by academics at Warwick and the London School of Economics, found a rising number of individuals recording millions of pounds of income as “business activities” rather than work.

​The current rate of capital gains tax for higher earners can be as low as 10% once tax relief is taken into account compared to 45%, the highest rate of income tax.

​The research concludes that inequality has been significantly higher in the UK over the past 20 years than previously assumed. This is because the Office for National Statistics does not include capital gains in its assessment of inequality in the UK. 

Tax Justice UK Executive Director, Robert Palmer, said: “This groundbreaking study shows that the ultra wealthy have been able to reclassify their income as wealth in order to benefit from lower tax rates.

“It’s truly staggering when we consider the impact this has had on overall inequality in the country. The gap between rich and poor is bigger than thought and this has implications for people’s lives.

“But the government can do something about it: tax income from wealth the same as income from work. As we come out of the coronavirus crisis, this is precisely the type of measure the government should implement. Polls consistently show that the public would support such a move.”

The report, Capital Gains and UK Inequality, finds:

• 5,000 people received over half (54%) of all capital gains in the UK. 
• The vast majority of gains come from business activities rather than passive investments. Often this is a substitute for labour income. 
• Gains are concentrated amongst those who already have high incomes.
• ​Including capital gains reveals a rise in inequality over the past two decades. While the share of all income going to the top 1% has remained at around 14% since 1997, by including capital gains it has risen to 17%, with the largest growth towards the very top.

Research by the IPPR estimates that up to £90 billion could be raised over five years for public services if CGT was brought into alignment with income tax.

Arun Advani, Assistant Professor, University of Warwick and Andy Summers, Assistant Professor LSE Law,
International Inequalities Institute will present their findings at a Resolution Foundation seminar: The Hidden Rise (and Fall?) of the top 1% on Thursday 21 May.