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CLASS Factsheet: Excessive Pay Levy

In April this year, CLASS think tank proposed the idea of an ‘excessive pay levy’ to both help tackle inequality and raise money for public services.

What is it?

The excessive pay levy is a proposed payroll tax levied on the employers for paying excessive salaries.  The goal is to de-incentivise the payment of these salaries, and to provide an extra source of revenue for public services. An excessive salary is defined as above £330K (20 times the National Living Wage).

How would it work?

Employers would pay a levy on every employee paid over £330K. The tax would be levied on the self-employed directly, ensuring the likes of high earning consultants pay their fair share. The Labour party’s version of our policy puts a moderate levy of 2.5% on the amount above £330K, and 5% on those earning £500K or more. These bands correspond to 20 times the current National Living Wage, and approximately 20 times the median wage. The excessive pay levy will be levelled on total compensation to reduce the incentives to avoid the tax. It is important to emphasise that this levy is paid by the employer, not employees. This is to avoid discouraging talented individuals from leaving the country.

Why do we need it?

The average FSTE 100 CEO now earns £5.5m per year (up 10% from the year before) and the ratio between average CEO pay and that of the average UK worker stands at 183:1. At the same time, our health, social care, and education services are all crumbling. This injustice is damaging our economy and our society.

An excessive pay levy would both incentivise healthy corporate behaviour and provide crucial funds to our struggling public services. In the longer term, this healthier corporate behaviour should encourage more sustainable economic growth and a more equitable society.

How much money could it raise?

The Labour party has estimated that the excessive pay levy at the levels suggested will raise £1.3bn of revenue in its first year.[1],[2]  Over time, it is reasonable to expect the amount of money raised would drop as companies adjust their compensation schemes.  But the ambition of this policy is to incentivise a healthier more sustainable economy, which would mean more tax revenue.

[1] Available at: https://www.gov.uk/government/statistics/income-tax-liabilities-statistics-tax-year-2013-to-2014-to-tax-year-2016-to-2017

[2] As amended from Durcan, D. (24 April 2017), “CLASS Ideas: The Need for an Excessive Pay Levy”. Available at: http://classonline.org.uk/blog/item/the-need-for-an-excessive-pay-levy

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