The Million Pound Question

Let’s start with a very basic question: how much do you need to be rich?

Let’s start with a very basic question, how much do you need to be rich? That is the million pound question or 30 million pounds if you account for inflation, which could be answered after these upcoming elections. The reason why this question might be important for Westminster is because politicians actually care about the definition of rich. Defining who the rich are helps with the creation and implementation of the different tax bands. After all, it is paramount for any working society that the ultra high net worth individuals also contribute their fair share to the economy.

However we are not talking about the top 1% here, but rather anyone that falls under the political definition of rich. For former MP Alistair Darling, the rich began at £150,000. From there on any extra income made was going to be taxed at 50%. Therefore, someone making £150,001 will have to pay 50 pence in taxes on that pound, while the rest of the income will be variable taxed based on the tax bands. In this example, the person will barely notice that his/her taxes went up by 50 pence. But if you were making £160,000, then your taxes went up by a hefty £4,999.5, and that was quite a noticeable increase.

Of course, there is an argument to be made against making income tax the definition of rich. Income varies quite significantly throughout the course of one’s life, and thusly it should not be considered as the benchmark on the creation of a rich list. And those who support those views do have a valid point. So much so, that former MP Darling also set a limit on the Lifetime Allowance (LTA) of £1.75 million. To be clear, LTA is the amount your pension can be worth and not how much you can put on your pension. Anything over that £1.75 million limit is hit by a 55% extra tax.

It is not too hard to guess that after Gordon Brown and the Labour party were replaced by David Cameron and the Tories, the definitions changed. Former MP George Osborne lowered the taxation rate for the top band to 45%. However, he kept the threshold still at £150,000. Another thing he did was the introduction of the taper rules. The taper rules are slightly simple and complicated at the same time. The definition of rich, for the purposes of how much you can contribute to your pension, were split into “threshold” income, which was set at £110,000, and “adjusted” income, which was set at £150,000.

There are two things that must be pointed out of the taper rules. The first one is that if you still do not know how they work and you think you fall somewhere in between, call your accountant as soon as possible. The second one is that if you make over £210,000 then you do not have to worry about it. People who make over that amount will never make a contribution to their pension higher than £10,000 but anyone in between can see their pension contribution range from £10,000 to £40,000. Furthermore, LTA shrunk from £1.75 million to just £1 million.

Overall, for most of the past decade, there was a general consensus on who the rich are. These people are those whose income starts at £110,000 – £150,000 and have, around £2 million in assets. The £2 millions are divided in £1 million IHT free, which means it’s somehow within the Nil rate band and another £1 million in other locations. However, the wind is changing. Theresa May is the new Prime Minister and we have little knowledge of what Chancellor Philip Hammond will do. On the other hand, the Shadow Chancellor, John McDonnell, has laid out his plans on multiple occasions. He wants to go after all the tax evaders, greedy bankers, and anyone that makes over £80,000. If the number seems a little to have picked in an arbitrary way, it was. The MP’s salaries stop at £74,000 so they will be exempt of the highest band.

The Conservatives are, for obvious reasons, calling what Labour is suggesting nonsensical. The proposal is not so much a vote loser, but it fails to realise that voters will quickly notice that the rate will not apply to the same MP’s that are complaining about others not paying their fair share of taxes. Furthermore, there could be an extra incentive by people to reject that idea proposed by Labour as well. At any given year, around 5% of the population earns £80,000. But over the span of a generation that amounts multiples by a tenfold as people get promotions and income changes. So it is really hard to see how people will be eager to vote for a redefinition of rich that could penalise them in the nearby future.

Regardless, MP McDonnell is not the focus of attention at the moment. That honour is reserved to PM Theresa May. And it is really hard to image the Prime Minister to increase taxes. At the moment, taxes are near the highest they have ever been as a percentage of GDP. Thusly, it makes sense for her to speak about making the country “fairer” and reducing the tax rate on working families. It would be interesting to see if she wants to redefine the word rich in order to increase it and maybe leave more room to manoeuvre for those who have to deal with living in a post-housing boom.

So, how much does it take to be rich? If PM Theresa May eliminates the taper rules, eliminate the LTA and, if she is brave enough, and abolishes the IHT and the complex and oftentimes silly rules then not much. None of these proposals would make the rich pay less in taxes, but it will make the rules simpler. That would leave people the ability to focus on creating more wealth instead of worrying about whether or not they are compliant with the current, complex taxing system.