The Institute for Fiscal Studies (IFS) has outlined various issues with the current tax system, particularly regarding the taxation of wealth. According to the IFS, large capital gains, many of which are based on luck, have contributed to the rise in net household wealth and the growing gap between generations.
The IFS believes that housing capital gains should be subject to taxation, and that pensions offer overly generous subsidies to wealthy individuals who are not at risk of financial insecurity in old age. One specific example highlighted by the IFS is the lump sum withdrawal rule, which allows individuals to take out a quarter of their pension, up to £268,275, without paying income tax. This means that a significant portion of pension wealth goes untaxed, and the biggest tax break is received by those with the highest pension wealth.
Additionally, the IFS criticizes the complexity and lack of transparency in the taxation of workers’ income. Rising effective tax rates can discourage individuals from working, and many people are unaware that additional income earned by someone making £25,000 a year will ultimately be taxed at a rate of 40%.
Official figures suggest that the number of individuals paying the top rate of tax will double this year. Chancellor Jeremy Hunt’s decision to lower the additional rate threshold from £150,000 to £125,140 means that 862,000 earners will pay the 45% rate in the current tax year, compared to 433,000 in 2020/21.
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