Highlighting that the UK's top rate of income tax is the highest in the G20, Chancellor George Osbourne announced that the top rate will be reduced from 50 per cent to 45 per cent from April 2013, in a bid to "improve competitiveness, encourage entrepreneurship and support growth". This will put the UK's top rate of personal income tax below that of Australia, Canada, France, Germany, Italy and Japan.
Those earning £150,000 or more have been subject to the 50 per cent rate since April 2010, when it was brought in by the Labour government. The Conservatives had pledged to cut the tax if they were elected and, in this year's Budget report, the coalition government argued that the comparatively high top rate of income tax harmed the attractiveness of the UK as a place to work particularly as a significant number of those affected by the additional rate are internationally mobile.
The Chancellor said the 50p tax rate had also caused massive distortions, pointing to findings by HMRC that £16bn of income was deliberately shifted into the previous tax year – at a cost to the taxpayer of £1bn. The increase from 40p to 50p also raised just a third of the £3bn it was expected to raise. He said it was neither efficient nor fair to maintain a tax rate that is not effective at raising revenue from high earners and risks damaging growth.
Tony Bernstein, senior tax partner at HW Fisher & Company chartered accountants comments: "While the reduction in the top rate of tax will be welcomed by many top earners, the justification by the Chancellor just doesn't stack up. It's highly likely that more money would have been brought in through the 50 per cent income tax rate if it had been left to run.
"Comparing the two years either side of the rate change doesn't tell the whole story. Just as taxpayers accelerated income ahead of the new rate, they will now be deferring income until after April 2013."
