Treading carefully on 50% rate landmine

THE 50% INCOME TAX RATE throws up important ideological issues relating to class society and property rights. No wonder then, say Ian Zeider and Ben Jones, the Government’s treading carefully

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Since its announcement by the previous Labour government, there has been no real clarity as to the future of the 50% top rate of income tax. Within six months of the announcement of a new additional rate of income tax in the November 2008 Pre-Budget Report, the rate had changed from 45% to 50% and its introduction accelerated by a year to April 2010.

The then Chancellor, Alistair Darling, indicated the 50% rate was a temporary measure to address the financial crisis and it was criticised by many Conservatives. However, the rate was retained by the Coalition government, which has since been giving mixed messages as to its future.

The reason for the uncertainty as to the future of the 50% rate is that, for many people, a higher rate of tax for those perceived to be wealthy touches on important ideological issues relating to class, society and property rights. It is therefore unsurprising politicians have been treading very warily in relation to this issue and that it is exposing divisions in the Coalition, with George Osborne repeatedly referring to the rate as temporary but Nick Clegg and Danny Alexander publically saying it should be retained.

So where does this all leave us? Well, George Osborne has requested a review be undertaken into how much tax revenue the 50% rate actually generates. Industry bodies and certain commentators have long maintained that, at best, it will only raise modest net revenues. This view takes into account the wider impact of the rate, both in terms of diverting higher earners and businesses from the UK to lower tax jurisdictions, as well as deterring such earners and businesses from coming here.

Account is also taken of the impact such diversion and deterrence has on those in the UK that would otherwise have been employed by, or sold services to, such earners and businesses. It is argued when all these factors are taken into account, the 50% rate may actually cause revenue to be lost rather than raised.

The outcome of George Osborne’s upcoming review will be critical to the future of the 50% tax rate. The Chancellor stated when announcing the review that he considers the rate to be damaging to UK business, and he is clearly looking for a reason to abolish it. If it is found not to raise significant revenue, he will have that reason to back up his argument. Against this will be opposition from the Liberal Democrats and potential adverse public opinion, particularly if the UK’s economic position has not improved. Concessions in the form of alternative taxes on the wealthy may need to be offered.

The Chancellor’s review is unlikely to be concluded until the New Year and we are only likely to have clarity on the future of the 50% rate at that point. The best advice for those currently concerned about the rate would be to wait for the outcome of the review, following which, it is hoped the position will become much clearer.

Ian Zeider and Ben Jones are associates in the tax group of law firm Eversheds