Fall in Top Rate Tax Take Compounds UK Revenue Crisis

by Robert Lee, Tax-News.com, London

04 June 2009

The number of higher rate taxpayers in the UK is expected to fall over the coming year due to a combination of the recession and the government’s own tax policy, heightening the Treasury's cash crisis.

Figures released by HM Revenue and Customs (HMRC) on June 3 show that the ranks of top rate income tax payers will diminish by an estimated 1 million, from 3.89 million in 2008/09 to 2.9 million in 2009/10. The resulting drop in revenue for the government will total about GBP16bn (USD26.25bn).

Currently, the top rate of income tax in the UK is 40%. This tax threshold kicks in on annual income of GBP37,400 or more, up from GBP34,800 in 2008/09, which may account for a portion of the fall in the number of higher rate tax payers. However, a bigger factor is likely to be the ongoing credit crunch and resultant recession, which has led to thousands of well remunerated finance professionals losing their jobs. Indeed, research by the Centre for Economics and Business Research has concluded that the number of millionaires residing in the UK fell by 50% to 242,000 between 2007 and 2009.

HMRC statistics also reveal how higher rate taxpayers pay a disproportionate amount of tax compared with basic 20% rate taxpayers. In 2008/09, there were an estimated 25.8 million basic rate taxpayers, who contributed GBP64.9bn in income tax. During the same year, just 3.56m high rate taxpayers contributed GBP83.9bn in income tax.

At the last budget, the government said that tax and national insurance receipts would be GBP5.3bn lower than thought in 2008/09 at GBP243.2bn. A further 5% decline is expected this year, but revenues have been shrinking at an alarming rate across the board, including corporation tax and value-added tax receipts.

The figures could explain why the government was so keen to break one of its key manifesto pledges not to raise income tax with its decision in the last budget to create a new 50% top rate of tax.

The 50% tax rate starts from April 2010 and applies to income of GBP150,000 or more. Those earning GBP100,000 and above will also lose their tax allowance, which currently stands at GBP6,475. However, widespread doubts persist over whether this measure will raise as much revenue as the government hopes, especially in the light of the startling admission by Chancellor Alistair Darling that he more or less plucked the 50% rate “out of thin air” because it sounded like a good number. “There is no science behind it,” the Chancellor told the House of Commons Treasury Select Committee recently. “It's simply my judgment that I thought that figure was an appropriate one.”

In a report critical of the government’s budget tax proposals, this same committee said that there were “considerable uncertainties” about the amount of tax that the 50% rate would yield.

As many tax experts have pointed out since April’s budget announcement, a significant proportion of those falling under the new top rate tax bracket will have the means to avoid it, either through employing new tax strategies, working less, taking early retirement, or simply emigrating.

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