Defending the Wealthy? Our Thoughts on the Row About Tax Avoidance

George Osborne’s budget speech highlighted the boast of some high earners who claim they pay less in tax than their cleaners. The government has announced a cap on tax reliefs to crack down on so-called rich “tax cheats.” On the surface, this seems commendable, but it is crucial to understand why many wealthy individuals pay less than 40% in taxes on their income.

One major reason is their contributions to charity. Rather than exploiting dubious loopholes, many affluent individuals are committed to giving back to their communities. Government policies have historically encouraged this behavior.

Instead of indulging in luxury items like a bigger fleet of cars or expensive watches, these individuals donate substantial sums to charities, benefiting the community as a whole. For instance, if someone earns two million pounds and donates half to charitable causes, they receive tax relief on the donation and pay 40% tax on the remainder. This scenario allows them to “pay only 20% tax on earnings of £2m,” a point criticized in the Chancellor’s speech and media.

The government’s proposal has stirred significant controversy within the charity sector. Without tax reliefs, charitable donations will diminish, making it less attractive for wealthy donors to contribute. This could further decrease charitable giving or delay donations until after death, taking advantage of legacy tax reliefs.

We believe the government should not divert millions from charities at a time when private funding is crucial. The charity sector is actively campaigning against this issue. To learn more, visit our thoughts on the row about tax avoidance.

For further reading, check out our articles on The Gap Between the Rich and Poor and Response to the government’s payment by results scheme for Neets announcement.

Note: This article excludes the impact of tax allowances, the higher 50% tax rate, and the Gift Aid mechanism for higher rate taxpayers to focus on the primary issue.