Study finds that some UK residents pay twice as much tax on their earned income as they do on capital gains.

According to a study on inequality in the UK’s tax system, a graduate who earns £35,000 per year pays nearly twice as much tax than someone earning the same amount from renting property.

According to the Intergenerational Foundation, people who are employed pay higher tax rates because of their income tax and national security payments than those who enjoy lower rates of capital gains tax on income from property and shares.

A person earning £60,000 in capital gains or dividends per year pays less tax than a 16-64-year old working for £35,000.

The foundation, an independent charity which funds research on issues that affect young people, said: “Earned Income is taxed in these cases two to four time more than unearned Income.”

The foundation, using HMRC data analysis, said that increasing CGT to the same levels as earned income rates would generate at least £10bn more a year. This would allow the government to reduce tax rates by at least 1,25 percentage points at each income threshold.

In recent years, the momentum for equalising capital and employment tax has increased. Recent polls have shown that reform is supported by all political parties, with 61% of respondents saying so.

The Office of tax simplification, before it was scrapped said that the tax system could be designed better if CGT rates and income taxes were closer aligned. It claimed that bringing CGT to the same level as income tax would generate £14bn.

Former Conservative chancellor Nigel Lawson, in 1988, set CGT rates at the same levels as income tax. He said: “In principle there is little difference in economic terms between [earned] earnings and capital gains… And if there is any difference, then it’s not clear why the one should be taxed higher than the other.”

Capital gains are up 16 times since Lawson took office. They went from £5bn per year to £80bn estimated for 2020-21. However, the tax revenue from capital gains is only up three times, to £15bn.

Taxpayers at higher rates earning more than £50,000 per year pay 42 % on each additional pound they earn from employment. However, gains on shares and gains on real estate are only subject to a 20% tax.

The standard rate of taxation, which is the majority of taxpayers above 65 years old, only charges 18% for gains on real estate, 10% for gains on shares, and 20% on rental income.

The authors stated that the current system allows for a significant level of avoidance of tax by those who have income from capital gains. They are allowed to smooth out the declaration of their earnings to ensure it falls under the threshold of tax over a number of years.

The report stated that “the wealthy receive two main benefits from the current system, which are not available to the majority of the population. First, they get a large amount of capital gains tax-exempt; second, they pay a maximum of 20% tax, which is half of the highest rate of income taxes.”

It added that “those who are able to manipulate the tax system for their benefit tend to be those of high income or wealth, leaving an increased tax burden on those with lower incomes and younger people, further perpetuating inequality between and within generations.”

According to the report, tax benefits granted in the UK for those with unearned income are overly generous by European standards. In Germany, for example, the annual exemption allowance is only €1,000, and all capital gains will be taxed by 26.38%. Meanwhile, unearned income in France is taxed between 30-34%.