Why the rich were better off under 1970s Labour

Telegraph

13-05-2025

The 1970s are often associated with strikes, punk, bell-bottom flares and platform shoes. But the decade is also remembered for eye-watering tax rates under Harold Wilson's Labour government.
Back then, the top rate of income tax was 83pc on earned income over £20,000 (the equivalent of £153,000 today) and 98pc for those with 'unearned' income thanks to the investment income surcharge.
And yet, it appears the rich were technically better off under the tax system of the 1970s, thanks to a plethora of tricks and loopholes available at a time when the taxman was much more relaxed.
Today, the top 1pc of earners pay almost a third – 28pc – of the nation's income tax bill. But in 1978 that share was just 11pc.
It may seem counter-intuitive but there are reasons why the wealthy paid less tax in the 1970s than they do in 2025.
One is simply that the rich earn more now. The share of household income going to the top 1pc doubled from 4pc to 8pc between 1970 and 2013, according to the Institute for Fiscal Studies.
But that is not the only reason. Research by Tax Policy Associates, a think tank, has found that the high rates of the 1970s were easier to avoid. For example, high earners could choose to take their pay in the form of perks like cars or meals out because there was no income tax on benefits in kind.
Interest on mortgages and business loans was fully tax-deductible until 1974. And before the 'temporary non-resident' rules were introduced in 1998, someone who had made a large capital gain could leave the UK and return the next year to avoid paying the bill.
On top of this, high rates fuelled a boom in tax avoidance schemes at a time when there were fewer anti-avoidance rules.
Dan Neidle, of Tax Policy Associates, said the tax policies of the 1970s 'failed to tax the rich effectively', while Chris Etherington, of RSM, called the UK tax system 'unrecognisable' from what it looked like in the 1970s.
Today the tax code is over 23,000 pages long, but in 1976 it was just 1,626.
Mr Etherington told Telegraph Money: 'The simplicity in the system provided more opportunity for individuals to minimise their tax liabilities and we now have an array of rules to counter tax avoidance that didn't exist at that time.'
There has also been a major shift in attitudes towards tax over the past 50 years.
He added: 'The majority of individuals simply want to ensure they are paying the right amount of tax at the right time and will steer well clear of aggressive tax schemes, which HMRC now has the tools to counter.'
In recent decades a number of tax rises have specifically hit higher earners. One example is the tapering of the personal allowance under Gordon Brown.
Introduced in 2009, this led to effective 60pc tax rates for those earning over £100,000, who would see their personal allowance reduced at a rate of £1 for every £2 earned over the threshold until it disappeared.
Mr Brown also froze personal allowances in the 2000s rather than increasing them with inflation. This resulted in a phenomenon known as fiscal drag where workers pay more tax as wages rise and thresholds remain frozen.
Mike Warburton, The Telegraph's tax columnist and formerly a director at accountants Grant Thornton, said: 'Gordon Brown was the master of raising tax by stealth through freezing personal allowances.'
Nimesh Shah, of accountancy firm Blick Rothenberg, said since then the higher rate had also been adjusted more gradually compared to the personal allowance.
'As the personal allowance increased under the Coalition government, the higher threshold increased at a slower rate, meaning more people were pulled into 40pc income tax.'
The personal allowance of £12,570 and the higher rate threshold of £50,270 have now been frozen since 2022.
This has led to an increase in the share of workers paying the higher rate. The number caught in the 40pc band has soared from three million in 2010-11 to over six million today.
More recently, the capital gains tax allowance was slashed from £12,300 to £3,000 and the dividend allowance from £2,000 to £500, hitting those earning an income from investments.
In her maiden budget, Rachel Reeves also raised capital gains tax, closed inheritance tax loopholes and cracked down on non-doms.
She is now facing pressure to raise taxes again following warnings that her National Insurance raid threatens to blow a £57bn hole in the public finances.
This has led to growing speculation over whether she will target higher earners once again or break her pledge by raising income tax or National Insurance.
Mr Warburton said: 'We all know that there is pressure on public services, especially the NHS, and that it has to be paid for. It is misleading to suggest that this can all come from the rich.'