Treasury reveals tax burden is heaviest on poor

BRITAIN’S richest people are paying 4p in the pound less in tax than any other section of the population, according to new figures released by the Treasury.

The data show the top 1% of households hand over 31% of their income when all direct and indirect taxes are accounted for, compared with an average of 35% for everyone else.

Much of the gap has opened up because, while the rich pay a higher rate of income tax, they pay a smaller proportion of their income in indirect levies such as television licences and Vat on goods and services.

The Treasury analysis, which covers figures for 2005-6, the latest available, has been seized on by critics who believe the figures show Labour’s tax regime has excessively favoured the rich.

Vince Cable, the Liberal Democrat shadow chancellor, to whom the figures were released, said: “People at the very top pay a smaller percentage than people at the bottom. Despite the claims that the tax system is progressive, it seems that people right at the top are paying less.”

Cable is concerned that the tax burden has increased most on the lowest earners.

It is unclear whether the figures include the tax paid by people with nondomiciled status. If it does not, it may understate the disparity between the rich and the rest.

Gordon Brown has shied away from new taxes on the rich to avoid undermining the City and scaring off investors.

During the summer there was public controversy about the low rates of tax enjoyed by private equity tycoons, some of whom can pay as little as 10% on their earnings.

The controversy was stoked in June when Nicholas Ferguson, chairman of SVG Capital, admitted in an interview that he felt uncomfortable paying lower taxes than his cleaner.

“Any commonsense person would say that a highly paid private equity executive paying less tax than a cleaning lady or other low-paid workers . . . can’t be right,” he said.

Although the Labour government initially claimed it would promote a progressive tax system, whereby the highest paid contribute more in taxes, the figures undermine the claim.

For the lowest 10% of earners, the average annual income per household is £8,366, of which 44.2% is paid as tax.

At the other end of the spectrum, the top 10% of households receive an average £88,334 and pay 35% in tax. The highest-earning 1% have an income of more than £92,300. Households on the median income of £24,700 pay 35.3% in tax.

Mike Warburton, senior tax partner at Grant Thornton, the accountancy firm, said: “Up to certain income levels, whatever income people get they spend and get hit with taxes. But at the top end people start putting money into their savings and some of the big items of expenditure for these people - notably private school fees - do not attract Vat.”

The tax status of nondomiciled residents, who are taxed only on the investment income they remit to the UK, has also been questioned.

A number of donors and lenders to the Labour party have benefited from this status. They include Lakshmi Mittal, Britain’s richest man, Lord Paul, the industrialist, Sir Gulam Noon, the curry tycoon, and Sir Christopher Ondaatje, the publisher.

The provisions have been officially “under review” by the Treasury since 2002, but no conclusions have been published. Treasury documents published under the Freedom of Information Act showed that there were 77,000 people in Britain benefiting from nondomiciled status in 2002. The number is now put at nearly 200,000.

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