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In many parts of the world, wealth is celebrated and admired. This is especially true in Asia, Africa, and the United States, where the “American Dream” ethos fosters the belief that hard work and ingenuity can lead to fortune.
This aspiration has driven the US to become the world’s most dynamic economy. Yet, in the UK and much of Europe, particularly in northern countries like Norway and Sweden, there’s a growing suspicion and hostility towards the wealthy.
Misconceptions About the Wealthy
The super-rich are often depicted as societal villains responsible for inequality, tax evasion, and even undermining democracy. This portrayal is prevalent in media and films, where billionaires are frequently cast as greedy, morally dubious characters who exploit legal loopholes to avoid paying taxes. As a tax lawyer with over 25 years of experience advising the wealthy, I can offer a different perspective on these popular myths.
Myth 1: The Wealthy Pay Lower Taxes
One common myth is that millionaires pay a lower effective tax rate than their cleaners. This misconception stems from misunderstandings about how the tax system works. In the UK, general income, such as earnings and interest, is taxed at higher rates than dividends. While dividends face a top rate of 39.35%, they are taxed twice – first at the corporate level and then again when received by shareholders. This can result in an effective tax rate of up to 54.85%, compared to the 45% rate for general income.
Capital gains, another significant part of wealthy individuals’ income, are taxed at rates between 10% and 24% for all taxpayers, with no special lower rates for the rich. For example, a person with £1 million of income, split between earnings, dividends, and capital gains, would pay an effective tax rate of 38.1%. In contrast, someone with £50,000 of income would pay an effective rate of 10.3%. The wealthier you are, the more tax you pay, both in quantity and effective rate, reflecting the progressive nature of our tax system.
Myth 2: Tax Evasion is Rampant Among the Rich
Another myth is that paying tax is voluntary for the rich, thanks to their access to top tax lawyers who exploit loopholes. However, genuine loopholes are rare, and any that exist are countered by HMRC’s “General Anti-Abuse Rule.” Aggressive tax avoidance schemes are not only unethical but also largely ineffective under current regulations.
Myth 3: Non-Doms Exploit Tax Loopholes
The idea that non-domiciled individuals (non-doms) exploit tax loopholes is also misleading. The non-dom regime has been part of the UK’s tax system since 1799 and is not an unintended gap in legislation. Non-doms contribute significantly to the UK economy, paying an average of £123,000 in tax annually. In total, non-doms contribute nearly £8.5 billion in UK taxes, not including additional business-related taxes. While the UK phases out this system, countries like Italy and Greece are introducing their own non-dom regimes to attract wealthy foreigners.
The Contributions of the Wealthy
Overall, the top 1% of taxpayers in the UK pay nearly 29% of all income tax, while the top 10% pay 60%. These contributions fund essential public services, including healthcare. Without these taxpayers, the financial burden on the rest of society would be significantly higher.
Changing the Narrative
It’s time to shift the narrative around wealth. Instead of vilifying the wealthy with terms like “filthy rich,” we should celebrate their success and contributions. Recognising the positive impact of the wealthy on our economy and society could foster a more supportive environment that encourages prosperity and innovation.