UK Tax System Shift: Top Earners Pay More Without Rate Hikes

The top income tax bracket in the UK is now contributing significantly more revenue than in the post-financial crisis era, without any dramatic tax rate increases. This shift is primarily due to the erosion of tax thresholds. Introduced in 2010 at 50% on income over £150,000, this bracket initially accounted for £35 billion, or 23% of total income tax collection. Today, it yields £138 billion, representing 40% of the total, with the number of contributors tripling to 1.3 million.

The mechanism behind this increase is the freezing of tax thresholds. While the top rate was reduced to 45% in 2013, the £150,000 entry point remained unadjusted. As wages rose, more individuals were pushed into the higher bracket. Subsequent high inflation and a further reduction of the threshold to £125,140 in 2023 accelerated this trend. The real value of the original £150,000 threshold has nearly halved, as it would now require approximately £240,000 to match its 2010 purchasing power.

Consequently, the top 3% of UK taxpayers now contribute 12% of all national tax revenue, a substantial increase from the 6% they provided in 2010. This phenomenon has led to some high-profile departures of wealthy individuals, such as a hedge fund founder moving to Greece. More common responses among the affluent include increased pension contributions, charitable donations, and early wealth transfers to family members to mitigate inheritance tax.

This situation in the UK mirrors trends in Israel, where the top tenth of earners pay 63% of direct taxes while accounting for 46% of income. The top 1% in Israel contribute over a quarter of all tax revenue. Notably, the average effective tax rate for Israel's top 1% is lower than for the rest of the top tenth, due to a larger portion of their income deriving from capital gains, which are taxed at a lower rate.

As both countries face upcoming budget decisions, the debate centers on who should bear the tax burden. The UK's fifteen-year data provides a case study on the consequences of threshold erosion, while Israel continues to grapple with similar issues regarding income tax brackets, capital gains, and threshold freezes.