50p Tax Take Increases Use of Tax Planning

Saturday, February 25, 2012 Print Email

Despite the government’s desire to increase tax revenues from the controversial 50p tax rate for higher earners, it now looks like it may be having the opposite effect and depressing revenues.

While corporation tax leapt by 9.3% in January compared to the same month last year, total income tax payments only nudged up 2.4%.

Recent HMRC figures appear to provide evidence that the wealthy are taking steps to avoid paying the tax. January’s tax take for those submitting self-assessment tax returns, was around £10bn, £500m below the same month in 2011.

Francesca Lagerberg, head of tax policy at Grant Thornton, said: 'History has shown that higher tax rates often fail to deliver quite as much money as expected. This is because it changes behaviour.

'For example, many business owners may well have accelerated dividend payments prior to the tax change to get the old, lower rate and may wait longer to pay a large dividend again. Or people may revisit how they are paid and compare the value of shares in a business rather than higher core pay.

The Treasury has indicated that figures for the 50% tax take will be published within three months, later than initially expected.

Richard Mannion, national tax director at Smith & Williamson said: 'We understood that the stats would be produced by the ONS and a paper would be published by the Treasury. They will already be able to see from the tax returns how many people paid 50% tax. I personally would have expected that they could have checked this quite easily.'

The latest tax returns will, however, reflect the impact financial crisis. 'In the 2010/11 returns people would have been impacted by the economic crisis and there was also a lot of tax planning going on.

'All of history shows that high taxes cut the tax take. But there is a political momentum behind this to make the majority feel better about the bankers' bonuses, but it is a temporary measure. I would be very surprised to see that it had been a complete disaster.'

Although the 50p tax is seen as a temporary measure, which is likely to be removed before the 2015 election, there are negative impacts on growth.

Stephen Herring, senior tax partner at BDO, said: 'It is clear that both entrepreneurs and foreign executives are more reluctant to be based in the UK because of the 50p income tax rate. Good progress is being made on reducing the corporation tax rate (hopefully to 20% or below) but this is undermined, like it or not, by the excessive top tax rate which is uncompetitive with competing economies looking to secure foreign direct investment.'

The January tax take stood at £10.35bn, a drop of £509m. The 50p tax rate was introduced by Labour in April 2010 for those earning over £150,000.

Login to ReadyRatios


Have you forgotten your password?

Are you a new user?

Login As
You can log in if you are registered at one of these services: