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Taxing top incomes: design issues and challenges beyond politics

Author: Mei Lim Cooper

Published: 04 May 2023

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The recent biennial Institute for Fiscal Studies conference brought together delegates from academia, government and practice to discuss the taxation of top incomes. Mei Lim Cooper looks at some of the cross-cutting themes that emerged.

The top 1% of earners broadly encompasses those earning more than £130,000 per year. An income of more than £500,000 catapults one into the top 0.01% of earners. The top 1% of earners in the UK contribute a third of income tax revenues – a figure cited on both sides of the political debate. The recent Institute for Fiscal Studies (IFS) conference sought to look beyond the politics at the challenges of crafting fair and effective tax policy for this important taxpaying demographic.

Knowns and unknowns

Discussion kicked off by determining: “Who are the top 1% and how much tax do they pay?” This highlighted the concentration of top earners in the finance sector and in professional partnerships (eg, accountants and lawyers). Nearly a quarter of the top 1% are migrants, a proportion that rises further in the top 0.1%. London’s financial centre still lures highly-paid overseas talent. 

Despite continued media focus on the taxation of capital gains and business income, taxpayer data shows that even in the top 1% of earners, employment income is by far the most important source. 

However, researchers also spoke about areas where data is lacking. Many top earners have multiple income sources, often straddling personal income taxes and corporation tax. Analysing available income, rather than taxable income that individuals choose to draw on, therefore requires linking different sets of data – an involved exercise. Other data is missing, such as an overview of non-remitted income and gains, gifts, or pension returns.

A disparate and complex population

Several speakers noted that, despite some clear demographic trends, the top 1% of taxpayers is a particularly non-homogenous group. They often have more complex circumstances and wider sources of income to draw on than those further down the income scale.

Administratively, top earners present greater complexity and more risk.

This affords them greater flexibility over how and when to draw on income and gains. As a group they therefore show increased responsiveness to changes in taxation policy. This can manifest in either ‘real’ responses or ‘paper’ responses. Real responses may include working more or less, or migrating from the UK to avoid tax. Paper responses, on the other hand, include shifting timings or altering legal forms to make best use of tax rates and allowances. While the media and politicians overwhelmingly focus on or assume real responses, the revenue impact of paper responses cannot be ignored.

Administratively, top earners present greater complexity and more risk. This requires involved interaction with HMRC to clarify tax positions and reporting. HMRC’s continued push towards self-service digital channels for taxpayers with more straightforward affairs should, it is hoped, free up more specialist resources to deal with the wealthy population.

The UK, especially London, has a large population of international workers who have chosen to live and work in London, at least for some part of their career. Another area of uncertainty that arose in the session on taxation of internationally mobile individuals is understanding behavioural responses. 

For instance, it was widely agreed that the tax regime for non-domiciled individuals is overly complicated and does not effectively draw investment to the UK. Suggestions for radical reforms were put forward. These included moving to a long-term residence count rather than the nebulous domicile test, or an upfront lump sum payment in return for several years of tax exemptions. However, it is hard to predict how the internationally mobile might respond to such changes.

Looking at recent trends, an increase in remote working patterns since the COVID-19 pandemic may also become embedded in our modern working world. Employees, especially highly paid executives, may increasingly choose to work in a different country from the entity that employs them. This could risk a dissociation between where that employee’s value is being received, and where they are paying personal taxes. Could this mean a future where UK companies’ top management work in far-flung countries, eroding the personal tax base of the UK?

A case for alignment?

A pervading issue mentioned in many sessions was horizontal inequity across the 1% population. Put simply, there is a chasm between the tax rates that different top earners pay, depending on their available resources. A taxpayer who can fund their lifestyle through capital gains will pay a far lower tax rate than a taxpayer drawing the same amount through employment income.

It was suggested that moving to aligned rates of income and capital gains tax (CGT) would improve tax neutrality and go some way to removing distortive behaviours, such as the use of certain legal constructs to achieve tax goals. However, it may introduce other distortive responses; taxpayers who are able to may choose to defer realising gains in the hope that CGT rates will be lowered, or they may emigrate to avoid CGT. Cross-partisan agreement would be needed to convince taxpayers that alignment is not a temporary measure. This may be difficult to achieve politically.

Incentives and evaluation

There is also the question of whether a lower CGT rate is needed to encourage and reward risk-taking by UK business owners. Should tax rates be aligned and incentives delivered through credits and reliefs? And are the current reliefs on offer sufficiently well targeted?

Should tax rates be aligned and incentives delivered through credits and reliefs?

In some cases, notably business asset disposal relief (BADR), the consensus was no. According to HMRC’s list of tax reliefs the objective of BADR is: “To encourage genuine risk takers and entrepreneurs to start up or invest in their own personal company over the long term.” However, the short timescale for obtaining BADR (two years), the blanket rate at which it applies (10%) and the lifetime cap of £1m of gains were all listed as reasons that this relief fails to achieve those objectives. The relief was seen as a ‘nice-to-have’, but hardly an incentive for serial entrepreneurs to grow their company in the UK.

The importance of periodic evaluation of policies against their original objectives was a key message. Scrapping some of the poorly targeted reliefs from HMRC’s list of more than 1,000 might help to simplify our notoriously complex tax system. 

Additionally, there was discussion of whether tax is the right lever to be pulling in the first place. Breakout discussions on the taxation of family business suggested that grants may be more successful than the raft of venture capital reliefs on offer. The lack of analysis on the success of tax reliefs, however, impedes useful evaluation. 

This was echoed in another breakout session about tax havens and offshore evasion; while widespread information is now shared with HMRC under the common reporting standard (CRS), there is sparse data about whether this has helped identify evasion and reduce the tax gap. CRS is in its early days, so its effects may become more prominent as HMRC processes bed in. However, some analysis of its benefits against the huge cost of introduction and compliance by businesses would be welcome.


There are a number of unique challenges that the top 1% present for policymaking. The range of individuals within the group and the breadth of income sources at their disposal makes creating coherent policy difficult. Lack of comprehensive data and therefore limited research means that the demographic is not wholly understood, and their behaviour may be difficult to model other than anecdotally. 

Yet the sheer proportion of taxes that they contribute makes them impossible to ignore; they are a vital source of revenue for the UK government coffers. Chasing away the 1% is an underlying preoccupation when considering tax policy design.

The conference was a rare in-person opportunity for debate and discussion between a cross-section of tax interested parties. Some core principles of good policymaking were endorsed: simplicity; well-targeted reliefs with clear objectives; and timely evaluation of reliefs against those objectives. With simplicity high on the government’s agenda, hopefully at least one of these tenets will be seen in future policy.

Mei Lim Cooper, Technical Manager, Personal Tax, ICAEW