Redistributive policy

Top Income Inequality and Tax Policy – Institute For Fiscal Studies

Concerns about how much the “rich” earn, the activities from which they come, and how much tax is paid on that income are at the heart of debates about inequality. This is partly because the share of income going to the top of the income distribution has increased and is now much higher than in the early 1980s. A poll conducted for this review showed that 58% of Britons ‘worried’ that ‘the top earning 1% had more money than the other 99%’ and 42% agreed with the statement ‘the rich shouldn’t be able to keep getting richer – that concerns me” (Garrett and Day, 2021) These concerns have sparked significant debate about whether those at the top of the income distribution should face higher taxes on their earnings.

In this chapter, we use data from tax records, which provide better information about the highest incomes than that found in survey data, to define what is known about those with the highest incomes. in the UK and the amount of tax they pay. The main analysis is based on “tax income” – a broad measure that captures most sources of income but notably excludes capital gains and untaxed income (we discuss these sources of income separately). Taxable capital gains, including those from profits retained in businesses, flow disproportionately to the top 1% (Miller, Pope and Smith, 2019; Alstadsæter et al., 2021) while the top 1% Untaxed assets, especially those from primary residences, are more evenly distributed across the income distribution.


  • The richest 1% of UK adults received 15% of tax income in 2018-19. That’s more than flows to the bottom 55% of adults combined. The share of the top 1% was about 6% in 1980 and 10% in 1990.
  • The majority (65%) of the tax income of the richest 1% of adults comes from employment. (Employment generates 77% of income outside the top 1%). The top 1% of earners work disproportionately in the financial sector, which is highly concentrated geographically in London. The financial sector has played an important role in the growth of the top income share.
  • Business income – whether from self-employment or from owning and running a business – is much more important in the top 1%, and especially the top 0.1% rich. It represents 21% (29%) of the income of the richest 1% (0.1%), compared to only 9% for those below the richest 1%. The general composition of high earners has changed relatively little since at least the early 2000s.
  • The top 1% self-employed disproportionately work in professional services partnerships, including large legal and accounting firms. The average tax income of a self-employed person in the top 1% is £423,000, more than 30 times the UK median. By comparison, business owner-managers in the top 1% have a lower income on average (£294,000), but are much more evenly spread across a range of industries.
  • Income taxes in the UK are progressive – those at the top of the income distribution pay a greater share of their (tax) income in tax than those at the bottom. The top 1% of adults paid 34% of income tax in 2018-19. They paid 28% of combined income tax and national insurance (NIC) contributions – a substantial increase from 20% in 2003–04. Taxes are less upwardly biased when including NICs because the marginal NIC rate falls from 12% to 2% for higher rate taxpayers.
  • Income taxes reduce the inequality of top after-tax incomes to a greater extent since 2010. The top 1% (0.1%) received 11% (4.6%) of after-tax income in 2018-19, up from 14% (6.1%) in 2009-10. The decline in top after-tax income shares is partly due to policies that have raised more taxes at the top, including through a new “additional rate” of income tax.
  • Average tax rates vary widely among the top 1%. For example, the average tax rate for employees of the richest 1% is 42% (49% if we include employer NICs). Business owner-managers will be able to access a rate of just 27% on income received as capital gains – or 0% if realization of capital gains is deferred until death.
  • There are strong arguments for aligning tax rates with different forms of income, while reforming the tax base so that corporate income taxes do not discourage investment. This combined approach would directly improve horizontal equity and generate more revenue from the top 1% if desired.