As 50% top tax rate takes effect in UK, experts debate its likely effects

The controversial new rate, which takes effect on the day that Prime Minister Gordon Brown has announced a general election is to take place on 6 May, will affect an estimated 300,000 taxpayers, according to government estimates.

Other countries with a 50% top tax rate are Belgium and Japan, while the Netherlands has a top rate of 52% and Sweden’s wealthiest citizens pay 56.7%, according to KPMG data for 2009.

Switzerland levies 40% – Britain’s previous top rate – as do France, Gibraltar, Greece, Norway and South Africa.

Experts are divided on the extent to which the new higher rate will cause wealthy individuals to move abroad.  David Franks, chief executive of international wealth adviser Blevins Franks, is among those who think it will, based on the “three-fold increase” in inquiries his company has received over the last six months from UK-based individuals considering relocating abroad.

“When tax rates go up, people don’t necessarily leave that day, but when they plan to leave and then do leave, they often don’t come back,” he noted.

This is one reason some argue that the government’s predictions that it will raise an additional £2.4bn in tax revenue are overly optimistic.

Other reasons include greater use of tax planning and the shrinkage of the income tax base of high-income individuals, according to the London-based Institute of Directors (IoD).

In a report released today, entitled “The Folly of the 50 Per Cent Rate”, it argues that the increase to 50% is “foolish” and that the policy “should be abandoned”, because it “will raise little or no money, but it will send out a very bad message – both domestically and overseas”.

Impact ‘may never be known’

Grant Thornton tax expert Frank Strachan says the true impact of the new tax rate may never be known, “because it will be impossible to quantify how many executives/companies looking to invest in the UK to create employment opportunities are dissuaded” by it.

“Fifty pence in the pound over £150,000 income certainly brings taxation into sharp focus,” he adds.

Meanwhile, although the business community “is a far more mobile now than it ever was, so some executives will undoubtedly leave the UK”, he thinks many will remain in Britain because of their ties – even though, in Strachan’s opinion, the 50% rate is unlikely to change “whichever government is in power post May 6^th”.

Other tax changes that take effect today in the UK include changes to the personal tax allowance for those earning £100,000 or more, and an increase in pension contribution tax.

Below is a table from the IoD’s report, which sets out the top tax rates in 19 other countries. 

Personal income tax rates in 19 countries 
 

Source: KPMG, Individual Income Tax and Social Security Rate Survey 2009