Budget2011: 50% tax rate 'will inevitably fall'

HIGH EARNERS will continue paying the 50% rate for the foreseeable future, but its future hangs on whether the tax swells government coffers.

The chancellor said during today’s Budget that high personal tax “can do damage”, warning it may crush enterprise and stifle aspiration among business high-flyers.

However, advisers suggested that the key issue determining whether the rate is lowered was more likely to be if the revenue was lucrative.

Bill Dodwell, tax policy head at Deloitte, pointed to Treasury evidence, which shows 350,000 people were paying when the top tax rate was lower, but the increase to 50% has reduced the group to 275,000.

Describing the yield as “not gigantic” compared to total revenues, he suggested the levy could be decreased as soon as 2013.

Leonie Kerswill, tax partner at PwC, described the 50% levy as a “psychological barrier”, saying it leads people to seek legitimate avoidance tactics.

Kerswill said it is a good sign that the government is conscious of the issue, but argued the rate will not fall before the end of this parliament.

Osborne said the time is not yet right to cut the 50% level, adding “we’re all in this together”, and pointing to the freeze on public sector pay as a primary reason to maintain the elevated rate.

He suggested the premium charge actually undermines tax revenues, and has instructed HMRC to examine returns in order to throw light on just how much it brings in.

Experts said Osborne’s decision could hinge on HMRC’s analysis, which may mean next year’s Budget will already bring a drop in the controversial charge.

Greg Limb, private client advisory partner at KPMG, said the investigation will be the deciding factor for 50% tax.

However, Dan Crowther, private client advisory director at the auditor, warned there is a potential pitfall in the taxman’s study.

He said comparing the figures before and after the levy increase will not show how much income tax has been avoided, claiming sophisticated analysis is essential to avoid inflating the true sum.