UK Govt Revises Down 50% Tax Revenue Estimate

by Robert Lee, Tax-News.com, London

04 February 2010

UK Treasury minister Lord Myners has said that the government expects revenues from the new 50% top rate of income tax will be much lower than expected as taxpayers arrange their affairs to avoid paying it.

Lord Myners, the Treasury's Financial Services Secretary, told the House of Lords that "adjustments for the behavioural consequences of a new higher rate of taxation" have been made by the government, and accordingly the anticipated tax take has been "significantly reduced."

The government had hoped to trouser just over GBP1.1bn (USD1.75bn) in revenues from the new tax in 2010, and an additional GBP2.5bn in 2011. It is unclear what the Treasury now expects to receive, but Lord Myners insisted that, despite all the negative publicity surrounding Chancellor Alistair Darling's controversial 2009 budget announcement, the revenues will still be "beneficial.”

The 50% rate will apply to annual incomes of more than GBP150,000 from April 6 this year and is intended to help the government repair the tattered public finances. Lord Myners was keen to point out that the tax will affect just 2% of the UK population, although those lower down the income scale will also be affected by plans to remove personal tax allowances for anyone earning more than GBP100,000 from the same date. This means that someone earning from GBP100,000 to GBP125,000 will face an effective marginal tax rate of 60%. Higher rate pension tax relief is also being removed for this group of taxpayers.

However, tax experts have predicted all along that the government can expect to collect at lot less than originally estimated because it will be relatively easy for taxpayers to avoid the tax, for example by leaving money in a company to be drawn down at a later date, increasing charitable contributions to offset higher tax, and through pay rises this year before the tax comes into effect.

Another avoidance method is to leave the country altogether, but Lord Myners told the House of Lords that only "very small numbers of people appear to have gone overseas as a consequence" of the increase in the highest rate of taxation.

The longevity of the 50% tax remains uncertain; if Labour wins the election, it could remain for the duration of the next parliament, although some prominent ministers, such as Lord Mandelson, are thought to be in support of removing it sooner. The Conservatives have also uttered mixed messages on the tax.

Recommended