To what extent does the income tax system work to reduce the gap between the highest and lowest paid households in the UK? In a progressive tax system the average rate of tax rises with income. And we see from the table below that income tax is indeed progressive in its effects on disposable income. The average rate of tax rises from around 5% on incomes between £7,500 - £9,999 to three times for people in the £20-£30k income bracket. For people earning over £50,000 per year, over a quarter of their income is paid directly in income tax.
But the system is not as progressive as it might be and as it was over twenty years ago. The extent of the "progressivity" of the income tax system has been reduced over the years. Before 1979, the top rate of income tax was 83 per cent, with a 15 per cent supplement for investment income. Now most taxpayers face a similar marginal tax rate of 22% compared with a top rate of 40 per cent but on top of the basic rate there is national insurance contributions (NICs) at 11 per cent and 1 per cent extra on NICs for higher earners, making the overall rates 33 per cent, and 41 per cent. This is not such a great progression. If a government wanted to use the income tax system to achieve a more even final distribution of income, it could
- Raise the top rate of income tax above 40%
- Increase the tax free allowance for people
- Introduce lower marginal rates of tax for lower-income households
| Income tax payable: by annual income, in 2005/06
|
|
|
|
|
|
| Number of taxpayers (millions)
| Total tax liability (£ million)
| Average rate of tax (percentages)
| Average amount of tax (£)
|
| £4,895–£4,999
| 0.1
|
| 0.1
|
|
| £5,000–£7,499
| 2.9
|
| 2.0
|
|
| £7,500–£9,999
| 3.5
| 1,580
| 5.1
|
|
| £10,000–£14,999
| 6.1
| 7,560
| 9.8
| 1,220
|
| £15,000–£19,999
| 5.1
| 11,500
| 13.0
| 2,260
|
| £20,000–£29,999
| 6.4
| 24,000
| 15.4
| 3,760
|
| £30,000–£49,999
| 4.3
| 28,900
| 17.9
| 6,690
|
| £50,000–£99,999
| 1.5
| 25,900
| 25.7
| 17,000
|
| £100,000 and over
| 0.5
| 34,200
| 33.4
| 71,100
|
| All incomes
| 30.5
| 134,000
| 18.2
| 4,390
|
| Source: Social Trends 36, ONS
|
The easiest thing to do would be to increase the higher rate of income tax but this might create incentive problems in the labour market.
