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50% tax rate - no escape yet
by Terri Halstead - Tax Partner on 16 February 2012
The 50% tax rate imposed on higher rate taxpayers is a subject of much debate, I seriously question its effectiveness but it’s here to stay – for the time being at least. There’s been a lot of speculation in the press about how much the 50% tax rate measure will raise, but the truth of the matter is no one really knows.
Keeping money in the company
We’re in a situation where owner/managers who would have normally taken cash out of the company are just warehousing it. It’s a real period of uncertainty. Just a few months ago there was a view that the Government would get rid of this higher rate as soon as possible, but now it looks more certain that it will stay until at least 2015.
There was discussion that it would raise close to £2.7bn in 2012/13, £3.1bn in 2011/12 and £1.3bn in 2010/11. The fact that there’s no finance out there means that people have another incentive to keep money in the company, especially if they feel that the economic downturn is threatening their company’s existence.
The real crime
I think the real crime is that the people who earn between £100,000 and £115,000 are effectively paying tax rates of about 64%. That seems outrageous. There is no doubt it’s a disincentive and people are trying to manage their tax bills when they start reaching that £100,000 figure. They’ll look at options like pension or charitable contributions instead of crossing that threshold.
Another big drawback is the cost of administration. It’s not straightforward – it will cost tens of millions for HMRC to update their systems and I’ve no doubt there will be mistakes. That will lead to extra work for the Revenue and extra costs for taxpayers.
Pressure
Instead of the punitive approach, I would like to see the removal of this high level of tax and give people incentives. I believe a lot of people were quite happy to pay when the top rate was 40%. You hear arguments in favour of a flat rate as in some European countries. However, I think that would leave the Government open to the accusation that they favoured higher rate taxpayers and would be happy to see people on lower earnings pay more tax.
There is quite a bit of pressure on Mr Osborne in all sorts of ways. For example, when you look at tax rates across Europe you will see that 50% is not that far off some of the other countries. In fact, some of them impose the higher rate at a much lower level.
Accusations
What’s more, when you factor in the general economic uncertainty, the fact that it looks like public sector pay may be frozen until 2015, will undoubtedly mean postponing the removal of the 50% for some time. The Government do not want to be seen as pandering to the wealthy during public sector pay freezes . It has always been seen as a temporary measure – and eventually it will be abolished – but politics, rather than business sense means that it’s just too soon to take that step.
About Terri Halstead
Terri heads up the Midlands Tax Team as Tax Partner. With over 20 years tax experience, many spent with a big four firm specialising in owner-managed business and high net worth individuals. Terri's wealth of knowledge and experience ensures that our clients get great tax advice.
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