Personally I will start full time work very soon and I was just looking into how much I could potentially take home. It seems like the harder you work the more that gets taken. So I decided to type in an annual salary of £1,000,000 into an online calculator and the taxation is huge at nearly 50%. Here is a screen shot of balance sheet: Balance sheet

This got me thinking, surely wealthy people have ways around this, to avoid excessive Taxation.

How do they get around this?

  • I Do not understand why this question is too Broad? @JoeTaxpayer – Mcccccc Apr 14 '17 at 17:43
  • It basically amounts to "how do people avoid tax?", which doesn't really have a simple answer. Your assumption that wealthy people can just "not allow" themselves to be taxed is also rather dubious. – GS - Apologise to Monica Apr 14 '17 at 17:49
  • @GaneshSittampalam Alright, I understand that However if i just wrote the Question as " how do rich people avoid tax" i'd get complaints also, so i decided to expand giving examples, I feel what i've asked is clear – Mcccccc Apr 14 '17 at 17:53
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    Objection, assumes facts not in evidence (that high earners avoid tax). – shoover Apr 14 '17 at 18:57
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    Also confuses wealth with income. – shoover Apr 14 '17 at 18:59

There is even more than you may realize. The salary one receives is also reduced by the amount the employer must pay the government. Here in the US the employer pays social security and other payroll taxes on behalf of them employee without the employee ever seeing them in his check. They amount to over 10% of a workers salary, even for low income workers. Presumably the employer could afford to pay each and every employee 10% more if it were not for these taxes.

The one tax loophole just about everyone should take advantage of is retirement savings. I believe they are called PPP in the UK, or a 401K/403B/IRA here in the states. Here in the US there are income restrictions so for the truly high wage earners this becomes less and less of a break.

Other tax loop holes vary by time, income, and jurisdiction. There is a constant battle by legislatures to close any perceived loopholes and they have been pretty darn successful. One high income person's strategy for dealing with taxes, that I read on Boggleheads, was simply "Suck it up buttercup".

Truthfully very few people earn that kind of salary. In the UK to be in the top 1% of wage earners for 2015 you would need to make £162,000/year. This would result in an after tax contribution of £108,000, or a tax rate of about 33%. Citation

The other thing to note is that wealth is not directly correlated with income. There are lowish income people who live frugally and purchase assets with a decent portion of their income. While it is much harder for them to become wealthy, some are able to outperform higher earning counterparts because they shun excessive consumption. Owning assets is what makes one wealthy, not income.

Here in the US cars a big barrier to building wealth. A person can look wealthy by driving a nice car, but their balance sheet suffers devastating hits. The same could be said of electronics such as phones and computers.

Again laws vary, but currently in the US dividends are maxed at a rate of 15% and some argue that "this is a tax break for the rich only". However, many companies make it very easy to purchase their stocks and receive the benefits of dividends. Rather then entering into a raging political debate, this is one way to avoid some tax, but laws can change at any time.

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    The other side of this is that very few wealthy people actually become wealthy through salaries. (Movie & sports stars might be an exception.) They make their money from investments/stock options, which aren't taxed until you sell them (or receive dividends). For instance, Warren Buffet famously makes a salary of only $100K. – jamesqf Apr 14 '17 at 17:45
  • That is not true according to the research in Stop Acting Rich. For examples engineers are a demographic that many become wealthy through salaries (depending upon your definition of wealthy). Contrary to pop culture, actors and athletes are a low income, and a mostly poor demographic. For me I would define wealthy in the top 5%, or about 2 million. – Pete B. Apr 14 '17 at 17:49
  • @PeteB. When you say ' pop culture, actors and athletes are a low income' can you expand on this?. Also what would be your definition on how one become wealthy, through assets, Stocks e.t.c.? – Mcccccc Apr 14 '17 at 17:58
  • RE: "Suck it up buttercup" True story, back in 2001 when Arnold Schwarzenegger was running for Governor of California, his spokesman told the press what Arnold's attitude about taxes was: "He loves paying taxes. He feels that if he's paying a lot of taxes, he must be making a lot of money." Most honest statement on taxes I've ever seen in any political contest. – Beanluc Apr 14 '17 at 18:02
  • @Mcccccc, I'd agree with jamesqf that media and sports stars are a group who get wealth through salaries more than most. However, most entertainers and sports players (minor league) make very low salaries. It is a cliche that actors wait tables to pay the bills while hoping for their chance to break into the high salary realm. – user4556274 Apr 14 '17 at 18:02

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