50% Tax Hits UK

by Robert Lee, Tax-News.com, London

07 April 2010

Top earners in the UK will find less money in their pay packets from April 6 as the much-maligned 50% tax rate takes effect with the start of the new tax year.

First announced in the 2009 budget by Chancellor Alistair Darling, the additional 50% rate will apply to taxable income above GBP150,000 per year from 2010/11. At the same time, the personal tax allowance is being gradually withdrawn for all individuals with adjusted net incomes of more than GBP100,000, also from the 2010/11 tax year. The rate of reduction is GBP1 for every GBP2 above the income limit.

These measures are part of the government's plans to increase the tax take and narrow the budget deficit, which, although revised downwards in last month's budget announcement, remains at about 11% of the British economy in size. The two measures are expected to affect just 2% of the UK's income tax paying population, and together with the removal of higher-rate income tax relief for these taxpayers from next April, will raise, according to the Treasury, some GBP7.5bn per year.

Business groups, however, dispute the government's estimates.

"We believe the 50p rate is likely to raise little or no tax overall in the short-term, and lead to lower overall tax revenues in the medium to long term," said the Institute of Directors (IoD). "There are obvious tax planning opportunities that are likely reduce the revenue raised."

The IoD expects that some high income individuals will move to more competitive tax jurisdictions, thus shrinking the UK income tax base. However, the 50% tax could also have a knock-on effect on the corporate tax base as many directors of multinational groups will be tempted to take their parent companies outside of the UK.

“The superficial attraction of [the] 50p rate is that it will yield some new revenue from higher earners which can be used to tackle the fiscal deficit," commented Richard Baron, Head of Taxation at the IoD. "But once we dig deeper, we can see the policy is foolish. It will not help the people one would expect on lower incomes, but will create a further deterrent to new international capital coming to the UK, thereby impoverishing all of us indirectly over time.”

A survey published by Deloitte in February suggested that listed companies were planning to introduce, or were considering introducing, various tax planning measures to mitigate the impact of the 50% tax rate on their top employees. This survey indicated that the use of pension alternatives to salary, and the introduction of tax effective share plan structures, were the most popular tax planning options being explored.

Other measures confirmed in the 2010 budget included the freezing of personal tax allowances - the amount that can be earned tax free before income tax is charged - for 20% and 40% rate taxpayers at 2009/10 levels (GBP6,745). The threshold at which the 40% rate kicks in will also remain on hold at GBP37,400.

Darling's 2010 budget announcement also confirmed that from April 2011, tax relief on pension contributions (including the value of employer contributions for those in employment) for people with an income of GBP150,000 or over but below GBP180,000, will reduce gradually from their marginal rate to the basic rate (20%) as the income increases. Where an income is GBP180,000 or over, tax relief on pension contributions will be restricted to basic rate.

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