The Labour Party has announced plans to introduce a 45% income tax rate on annual incomes over £80,000 and a 50% rate on incomes over £125,000 from 2020–21. New analysis by IFS researchers, funded by the Nuffield Foundation, examines the likely effects of this policy.
Key findings include:
- Labour’s plans would raise income tax for 1.6 million people with taxable incomes over £80,000 a year. They are the highest-income 5% of income tax payers, or the highest-income 3% of all adults.
- Losses would be greater, in cash terms, for those with higher incomes. Someone with an annual taxable income of £100,000 would lose £1,000 a year, whereas someone with an income of £150,000 would lose £5,375 a year.
- The proposals would affect ever more people over time, since the £80,000 threshold would be frozen in cash terms. Approximately 1.9 million people will have incomes exceeding £80,000 in 2023–24: the top 6% of income tax payers or the top 4% of adults.
- The top 5% of income tax payers contribute half of all income tax revenues today, up from 43% just before the financial crisis. They receive a quarter of taxpayers’ income – similar to the share they had in 2007–08. The rise in the concentration of income tax at the top in recent years reflects a series of income tax increases for high-income individuals since 2010. These include the introduction of the additional rate (now at 45%), the withdrawal of the personal allowance, cuts in income tax relief for private pension contributions and real-terms reductions in the higher-rate threshold.
- The tax revenue that Labour’s proposals would raise is highly uncertain, and depends on the extent to which people reduce their taxable incomes in response to the rise in income tax. If no one changed their behaviour, the tax rises would raise around £10 billion per year on average between 2020–21 and 2023–24. Given existing evidence, a reasonable central estimate for the revenue raised is around £3 billion per year, but it is also plausible that it could raise up to around £6 billion or cost around £1 billion. All else equal people would respond less to the tax rise if avoidance opportunities are fewer, so it is possible that other measures introduced at the same time would affect the amount it would raise.
Xiaowei Xu, a Research Economist at IFS and an author of the report, said:
“Labour are proposing a substantial tax rise on the highest-income 3% of adults. This could raise some money – about £3 billion a year as a central estimate – and could have some effect on reducing income inequality. But it comes with risks, as those with the highest incomes are likely to respond to the tax rise by reducing their pre-tax incomes. The likely extent of these responses is highly uncertain, though the more Labour reduces the scope to shift income into more lightly taxed forms (like capital gains), the more revenue its income tax proposal would be likely to raise.
It is worth noting that we are already extraordinarily dependent on this small group of individuals for tax payments – they account for half of income tax revenues today. Perhaps contrary to popular belief, this group has seen the biggest tax rises over the last decade. Countries that raise more tax than us tend to have much higher taxes on people on average incomes, and not just rely on the highest income individuals for tax revenues.”