In his 2009 Budget report Chancellor Alistair Darling announced a sharp increase in income tax for high earners.
Employees that earn more than £150,000 a year will pay income tax of 50%. This will be enforced from April 2010.
The change contrasts to the hike in income tax to 45% for high earners that was announced by the Chancellor in his pre-Budget report in November 2008, which the government had planned to introduce in 2011.
In addition from 2010/11 the basic personal allowance for income tax will be reduced for those with an adjusted net income above £100,000. This means that the amount of the allowance will fall by £1 for every £2 above the income limit.
The Chancellor introduced the measures as part of efforts to reduce government borrowing to £261.2bn by 2013-14.
In the Budget report the chancellor said: “Over the medium-term the Government’s fiscal policy objective is to ensure sound public finances and that spending and taxation impact fairly within and between generations. Building on the significant fiscal consolidation announced in the 2008 Pre-Budget Report, this Budget sets out tax and spending measures that reduce borrowing by £261.2 bn by 2013-14.”
The Chancellor has increased the proposed top rate of income tax, on those earning over £150,000, from 45 per cent (as announced in the 2008 Pre-Budget Report), to 50 per cent. The new rate has also been brought forward, coming into effect in April 2010 (in place of April 2011), breaking Labour’s manifesto pledge not to increase the basic or higher rates of income tax in this Parliament.
In addition, from 2010-2011, the personal allowance for income tax will be gradually reduced to nil for individuals with incomes above £100,000, as opposed to the two-stage reduction announced in the 2008 Pre-Budget Report.
Nigel May, Tax Principal at chartered accountants and business advisers, MacIntyre Hudson comments: “The Government’s singular attack on the wealthy has created a situation in which top earners will be working more for the Government than they are for themselves. This move will also create a system of crippling marginal tax rates which we have not seen for a generation. Considering the ease with which top talent can migrate around the globe to countries with more favourable tax regimes, the Chancellor is seriously gambling with the attractiveness of this country as a place to do business.
“For those earning over £100,000, their personal allowance will be reduced by £1 for every £2 above the income limit. The Chancellor is introducing an effective marginal tax rate of 60 per cent for those earning between £100,000 and approximately £112,000 a year. This is made worse if you take into account National Insurance. The proposal in the Pre Budget Report for a two stage removal of the personal allowance when income reached £100,000 and then £140,000 a year, made a graph of our marginal tax rates look like a side-view of Battersea power station. Today’s revision has simply demolished one chimney and pumped up the other!
“All in all, in a Budget where the Chancellor is primarily pinning our turnaround on optimistic forecasts for future growth, taxing the rich is an easy political move, the effectiveness of which in boosting the Treasury coffers is questionable. Alistair Darling has sought to throw down the gauntlet to the Tories to oppose the increase, and side with the country’s wealthy. But he may have done better to hang on to his armour. In a Budget that was all about credibility, it may be hard for Darling to shrug off the broken manifesto pledge while our economy remains so finely balanced.”
Nigel May, Tax Principal at MacIntyre Hudson, comments:
“The Chancellor has confirmed by his silence that Employers’ National Insurance Contributions will rise as planned by 0.5% in April 2011. What happened to the “Budget for Jobs”? This represents a rise in the nearest our system has to a tax on jobs, planned to come in just as unemployment reaches a new peak somewhere over 3 million.”
Commenting on today’s announcement Chris Blundell, partner in the employment tax services team at international accountancy firm Mazars says:
“The new 50% tax rate for individuals earning in excess of £150,000, effective from 6 April 2010, is a significant shift upward form the previous announcement of a 45% tax rate from 6 April 2011.
For large companies operating internationally, this will mean a huge hike in the cost of seconding individuals to the UK on net pay schemes from what is currently £1.67 for every £1 of net pay to £2.00 for every £1 of net pay – an increase of 33p for every £1 of net pay. This, together with the loss of the personal allowance previously announced, will lead to a colossal increase in costs where an organisation tax-equalises individuals seconded to the UK.
Further combining these costs with the high cost of living could significantly affect an organisation’s decision to send individuals to the UK. This is likely to lead to an increase in the number of companies now looking to use more favourable tax locations in which to base their talented individuals such as Hong Kong, Dubai or Switzerland.
Even for those individuals coming to the UK on local terms, the marginal tax rate for individuals earning in excess of £150,000 including the projected increase in national insurance from 6 April 2011 will now be 51.5%. Again, they will also not benefit from the UK personal allowance which will cost them a further estimated £2,500.
These measures rather than encouraging inward investment, will more likely accelerate a brain drain to other economies.
There has also been an announcement to end the use of premium leases as a way to reduce the tax on accommodation provided by employers for individuals moving to the UK. Now, it will be necessary to pay tax and national insurance (where applicable) on the full market rental value adding still more costs to individuals relocating here.”
“We support the Chancellor’s moves to make the tax system more progressive by increasing the top rate of tax to 50%, restricting personal allowances and pension tax relief for high earners and increasing efforts to reduce tax avoidance. It is only fair that higher earners – who have seen their relative incomes increase over the last decade – should pay more, rather than the less well-off.”
Restricting tax relief on pensions to 20% and then still taxing penson when paid at 40%/50% seems pretty odd to me and will act as a deterrent to pension saving- much better to stop tax free tax being drawn at retirement which is abused by the rich as they apporach retirement- they put in money and get tax relief and then draw it out soon afterwards when they retire tax free=but then so much of the public sector senior Treasury civil servants might lose out I suppose they wouldn’t put that forward would they!