What on earth can they do with all that money? It is an understandable response to the salary and bonus windfalls for top earners in industry-and especially the City. Nor is the question merely of prurient interest. As one commentator, William Wallace, wrote in the Financial Times: "If a medium sized merchant bank [Barings] pays an annual bonus of ?100m, we can assume that the sums received by senior City employees as a whole are now a significant factor in the economy of the south east-if not of the UK as a whole. Is there any evidence available as to how these substantial sums are spent?" Not until now.
There is no official information on the subject because the top income groups for government statistics generally cover a much wider range of incomes than the top salary earners alone. The government's General Household Survey lumps together all those above ?40,000, while the top category in the Inland Revenue Statistics includes all those over ?100,000 (for some items, over ?50,000). Even the smallest of these groups-those on over ?100,000-represents as many as 95,000 income earners (0.37 per cent of the total).
Hence our top salary survey. We defined earnings as pre-tax income including salary, bonuses, dividends and capital gains on shares in the companies in which the individuals work. Almost all respondents earned at least ?500,000 per annum, but the strict qualifying level was a minimum average earning for the past three years of ?350,000.
number of top earners in Britain
By extrapolating from the most recent Inland Revenue Statistics we estimated that 4,700 people earned more than ?500,000 last year. This group accounts for about 1.1 per cent of total personal incomes in the UK. They represent only 0.008 per cent of the population, or one in 12,300, but account for 0.5 per cent of UK consumers' expenditure and 2.3 per cent of total tax and national insurance receipts: in other words each of them-on average-pays as much tax as 125 average taxpayers put together.
What is the occupational breakdown of this group? The annual Labour Research survey of company reports for years ending in 1994 or early 1995 identifies 187 directors paid over ?500,000 per annum, of whom 58 earned over ?1 million. But this survey is mainly based on the records for directors' emoluments from the accounts of publicly quoted companies and could not be expected to include many of the high earners in financial services, the professions, small companies, sports and entertainment.
Scanning the Sunday Times list of the UK's 500 wealthiest people, one might expect a further 250 people owning unquoted companies in industry and commerce to be paying themselves salaries of ?500,000 or more. In addition it is believed that there are several hundred lawyers (mainly barristers) with earnings in this income bracket. There must also now be at least 100 people in sports, media and entertainment who earn above ?500,000 a year.
Yet most of those earning above ?500,000 in any given year are likely to be working in the financial services sector. Our survey sample contains 77 per cent from financial services and 11.5 per cent each from industry and the professions. Probably this slightly over-represents the financial services sector, but not by much. A typical City firm will pay bonuses of perhaps one-third of pre-tax profits after deducting a notional return on capital invested (the 50 per cent Barings pay-out was unusually high). This funds bonuses which would generate a total salary for a successful dealer of about one-quarter of his commission income.
Almost all top earners in financial services are traders in equity, bond and foreign exchange markets, particularly those dealing in derivatives. The second largest group appears to be fund managers, especially those in high-risk sectors. The rest are spread over a range of groups such as merger and acquisition experts, brokers of various types, and research advisers, such as investment strategists and even a handful of economists. Most successful firms will also have a small number of senior managers who earn top salaries.
The Labour Research list of top industrialists is useful because it gives some indication of the volatility of high earnings. Only half (94 out of 187) of those included in the 1995 list would have made it for the previous two years; 39 out of the 132 in the Labour Research list published in 1993 no longer qualified for the 1995 list.
Indeed, a number of people on the Labour Research list of those earning more than ?500,000 in 1995 whom we approached said that they did not qualify for our survey because their earnings had not been at the required level for the previous two years. Because earnings in financial services and small businesses are probably more volatile than those in publicly quoted companies, the indications from the Labour Research list may understate the extent of the "churn" in the top salary earners group.
So just as the Institute for Fiscal Studies has argued that any snapshot of low earners in a given period will overstate the extent of poverty (as a result of including those for whom the low earnings are temporary), the number of high earners in a particular year will be greater than the number whose earnings are constantly high (which might be as much as 30-50 per cent fewer.)
Have their numbers risen? Other than during the early 1990s recession, the number of top earners in the UK has been increasing since the late 1970s. Several reasons are behind this. The background is a global trend towards widening income differentials. Technology has increased the returns to skilled people, and the emergence of a world labour market for some of these skills has enabled them to translate these returns into high earnings. The UK has moved more rapidly than the rest of Europe towards becoming a market economy, and hence has been more exposed than the rest of Europe to the global labour market. It has also increased the volatility in many industries, so generating more "shooting stars" with temporary high incomes.
The abolition of incomes policies and other controls in 1979, and the reduction of the top tax rate on earned income from 83 to 40 per cent, means that high-fliers now concentrate less on perks, comfortable living and tax loopholes, and more on achieving very high pay. Whereas potential top earners used to go into tax exile, our survey indicates that the UK may now be attracting top earners from countries with higher tax rates. (There is, however, still a long way to go before we get back to the income disparities of the pre-war era. In 1936 Lord Hirst, the then chairman of GEC, earned ?100,000. To achieve the same after-tax spending power today, he would have had to earn ?1.9m-more than three times the pay of his present day successor.)
how important are they?
With those earning more than ?500,000 only accounting for 1.1 per cent of total incomes, the idea that swings in their spending could have an important effect on the economy as a whole is probably exaggerated. Our evidence from top earners in the City indicated that the Barings bonuses were exceptionally high-so it would be misleading to scale up using them as a base.
But there are clearly areas of the economy on which this small group has a disproportionate effect. They control significant savings flows, for example. And although insignificant in relation to the economy as a whole, their spending power is likely to be critical to many of the individual markets in which it is deployed-such as the London property market-which may have important knock-on effects elsewhere in the economy. Their spending may also have "demonstration" effects: affecting consumer behaviour in mass markets by establishing standards or fashions.
the survey
We sent out 400 detailed questionnaires and received 37 responses from people who met the earnings qualification. Clearly the sample is too small for it to be precisely representative and, because it was self-selected by those prepared to respond to a fairly intrusive questionnaire, there is a probable sample bias. But though we would caution against placing excessive weight on the precise numbers, the respondents cover a sufficient range of occupations, ages and backgrounds to give a good impressionistic picture of how top earners behave.
The survey respondents were all male, and their average age was 43. There was a preponderance of respondents from middle- and upper-middle class backgrounds, but a sizeable representation described their background as working class. Over two-thirds had been privately educated, but a sizeable minority had been educated at state schools.
The great majority of top earners surveyed (77 per cent) had college or university degrees. This is a factor which may have changed in recent years and certainly contradicts the notion that to make money in the UK, one must escape early from the clutches of the educational system.
Perhaps the most interesting characteristics of the respondents is the high proportion with foreign connections. Just less than a third are citizens of some other country and nearly half the sample have parents who are not or were not British citizens. While these proportions could be biased upwards in our sample because of the traditional British reserve towards talking about financial matters, these proportions are still a fascinating indication of the extent to which top jobs in the UK are now being taken up by those with cosmopolitan backgrounds.
Where does the money go?
From the responses to the survey, the top earners split their pre-tax income roughly into equal proportions between spending, investment and taxes. This compares with the national accounts figures for all income earners who spend most of their pre-tax income and invest only 7.6 per cent.
Common sense would predict that the rate of investment/saving for top earners would be well above the average, but even so, the proportion revealed in the survey-which amounts to more than half of post-tax income-is remarkably high, accounting for 5.6 per cent of national savings. It is possible that this proportion has been higher than usual recently because of economic uncertainty and weak property markets.
So, how do the top earners spend it? The state of property markets is especially relevant to this group because nearly half its expenditure is on property compared with only a sixth for the population as a whole. This might seem counter-intuitive because one might expect expenditure on "necessities" such as housing to fall as incomes rise. But the top earners seem to like buying property as a way of investing money. Just under half spend money on second homes, but the bulk of residential property expenditure is on the primary residence, including running costs and staff. Continuing expenditure on property by the high income groups may explain why central London property prices fell only 25 per cent from their peak in mid-1989 to mid-1995, compared with a 34 per cent drop in house prices in general.
A second area of consistently high expenditure in absolute terms for the top earners is travel and holidays. Although the proportion of expenditure on travel for this group is only 4.8 per cent, this is one of the main areas where most respondents spent significantly, averaging ?20,000 a year on personal/family travel.
A third area of distinctive behaviour is the purchase of antiques and works of art. Yet this is not a widespread phenomenon. For antiques, in particular, there is a correlation between the level of spending and background: those with an upper-middle class background allocate 9.7 per cent of their expenditure to antiques; those with a working-class background only 2.2 per cent. For art, however, although the level of spending varies from person to person, social background does not seem a key determinant. Given their heavy expenditure on property, it is not surprising that art and antiques account for 13.4 per cent of top earners' total expenditure-those properties need to be furnished. But spending on other collectables, such as classic cars, is only 0.3 per cent-lower than might have been recorded in the late 1980s.
Although top earners face higher household expenses than the population as a whole, such expenses still account for a lower proportion of the total. Top earners spend 25.7 per cent of their total expenditure on household expenses compared with a national average of 43.1 per cent.
Glossy magazines sometimes create the impression that life for the rich is largely about lavish entertainment. This may be so for those with inherited wealth but the top earners who have to work for a living are more modest. They spend an average ?11,000 a year on all entertainment-and some of this total includes holiday spending. This is a sizeable amount, but it would not be sufficient to pay for the type of party that ends up in the gossip columns. Spending on entertainment varies with social background. Those born upper-middle class spend about a quarter more on entertaining than those born working class.
The proportion of expenditure on clothes is much less than the national average for this group (though the figure is probably an understatement because it does not include spending on clothes by spouses who receive an allowance for the purpose). Here again there seems to be some consistent variation in expenditure patterns/background. Those from a working class background spend 65 per cent more on clothes than those from an upper-middle class background. The myth of the shabbily dressed English gentleman may hold true.
There is considerable variation-no doubt as a result of different family and other circumstances-in expenditure on allowances and education for children and spouses. For those with dependant children, the average level of expenditure including education is ?19,000.
About half the earners in the group provide a cash allowance for their spouse or partner. The average for those who do so is ?42,000, but there is substantial variation. An interesting, unexplained group of "others" receive an allowance, typically of about ?15,000 to ?20,000. These may be dependant relatives, but one respondent carefully wrote that his "other" allowance was paid to a "friend." Have we stumbled across the going rate for a mistress? The figure seems low-but this occupation, like others in the service sector, may have gone part-time.
The top earners give 2.3 per cent of their income and 6.0 per cent of their total expenditure to charities, a mixture of ad hoc, pre-committed and trust payments. This is much higher than people on average incomes, but still rather less than we expected. Nonetheless, more than half the group had some direct involvement with a charity. We estimated that the top earners account for between a third and a half of all payments to charities by private individuals.
Where Top Earners Invest
Because those who work in financial services generally have access to the low cost dealings which might facilitate running a self-managed equity and bond portfolio, one might expect top earners to be relatively sophisticated financial investors. And accordingly, the largest single share of top earners' financial investments are in their personal portfolios-15.9 per cent of pre-tax income; about 40 per cent of total personal investment.
Top earners invest what might at first seem a surprisingly large amount-?57,000-in liquid assets such as bank and building society accounts. But one respondent specifically commented that his income was volatile and he thus deliberately adopted a very conservative investment strategy. Perhaps others are doing the same.
Such conservatism might explain why the top earners in the sample directly invest relatively small amounts in unquoted companies other than their own. Such investment amounts to only 4 per cent of their total investment. If all top earners invested similar proportions this would amount to about ?100 million in total. Such a total would be surprisingly low given the extent of the tax advantages available from investing in unquoted companies.
Top earners who have their own companies seem to adopt a different spending and investment strategy from the others. They spend much less on property than the others (7 per cent of pre-tax income rather than 19 per cent) and invest much more in total. Of their investments, roughly half is income which is reinvested in their own company, but this is investment over and above the normal financial investments that are made in other types of assets. This sub-group also invests less in its equity and bond portfolio but about twice as much on average as the top earners in other unquoted companies.
Tax
Given the tax system and the income levels it is possible to calculate that these top earners are likely to pay about 45 per cent of their income, on average, in income tax and national insurance contributions. Although the survey did not ask directly about tax, the residual between pre-tax incomes, expenditure and investment gives an implicit figure of 27 per cent for tax deductions. This may seem low, but probably reflects the fact that some of the expenditure (especially that on property) is partly financed out of capital or borrowing. Given these factors, the implicit 27 per cent for tax and other deductions emerging in the survey is probably consistent with an actual total tax payment in line with the calculated figure of 45 per cent of pre-tax income. This suggests that the Inland Revenue has been largely successful in eliminating tax loopholes for this group. The top 1 per cent of earners pay 15 per cent of all income tax revenue; the much smaller group of top earners (4,700) account for about one-ninth of that.
Conclusions
In their saving and spending patterns the rich are different. They save and invest more and they spend much more on antiques, art and, especially, property. Although the incomes of the top earners considered here comprise only a small proportion of the UK total and their expenditure an even smaller proportion, the top end of the UK property market will largely be dependent on their spending. They are also likely to influence the antiques and art markets, although, at the top end at least, these markets are essentially international.
What of the future? Half our respondents expect their post-tax income to continue to rise. Those with doubts are worried by the prospect of higher taxes. But one of the respondents said he expected to be moving into the public sector; another (in his early 40s) was planning to retire.
The mid-1990s top earners seem a much more sober bunch than public stereotypes would suggest. They save half their post-tax earnings, and when they do spend, it is mainly on investment goods. In relation to their incomes they spend relatively little on cars, clothes and entertainment The only area where the 1980s image seems to hold true is that today's top earners still spend heavily on travel. Perhaps it is that they work such long hours that they have no time for riotous living and use their holidays to make up.
The rich - are they different?
October 19, 1995
