The 50% Tax Rate: What Next?

Date Added: 12 September 2011

The 50% rate of Income Tax for those earning in excess of £150,000 per year is currently one of the most divisive issues facing the Coalition.  The question of whether or not it will be scrapped in the near future will also be of great interest to anyone unfortunate (or fortunate) enough to be affected by it, and for their employers.

One of the most compelling cases for scrapping the 50p tax rate is that it probably does not raise much money.  According to one Treasury source, the revenue raised by the 50p rate may be as little as £750 million a year, out of total tax revenue of £519.8 billion.  Equally important is that a high rate of Income Tax may deter entrepreneurs and business owners from locating in Britain; the people at the top, who will be making the decision as to where to locate, are going to be the most likely to be hit by the 50p rate.  If this results in companies setting up instead in lower-tax jurisdictions, taking their jobs with them, then arguably the 50p tax rate may actually cost the Country money rather than raise it.

Set against economic arguments such as these, is the political question of fairness.  At a time when living standards are being squeezed and cuts are being made, there is widespread support for the view that if any tax cuts can be made, they should benefit the less well-off rather than those with incomes of over £150,000.  Supporters of the 50p tax rate also point to the small number of people who are obliged to pay it, and argue that tax cuts, if and when they come, should benefit the many rather than the few.

The controversy surrounding the 50p rate makes it very difficult to predict what will become of it.  The top rate will eventually be reduced, but this may not be for some time and it may not be reduced all the way back to 40%.  For these reasons, both high-earning individuals and businesses may wish to investigate the tax planning opportunities that are available to minimise its effect.  For example, companies with highly paid employees may wish to consider share based incentive schemes which can be very tax efficient.  Married couples where one spouse is a higher rate taxpayer can transfer income-producing assets, such as rental properties or shares, to the spouse who is not a higher rate taxpayer. Similarly, it may be possible for the spouse who is a higher rate taxpayer to employ the spouse who is not a higher rate taxpayer on a part-time basis, in each case reducing the tax payable overall.

One certainty is that taxes overall are likely to remain high for some time.  The rate of Capital Gains Tax has recently been increased for many people and the Inheritance Tax threshold been frozen.  Accordingly, tax planning is likely to become increasingly important for an increasing number of people. 

Hallett & Co have considerable experience in advising on tax matters and to discuss the opportunities available on an individual basis please contact any member of the Private Client Department.

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