45% top rate of tax
Regardless of whether you think a 50% top tax rate is fair or unfair, something good has arguably come of it; that a reduced top rate of 45% now feels like a good thing!
The Chancellor stated today that the 50% rate raised just
£1bn in income tax in 2010/11, a third of original expectations.
He also noted a loss of £1.6bn in 2010/11 due to accelerating
£16bn of earnings from that year into 2009/10 in order to
benefit from the 40% tax rate. No thanks were received for the
cashflow advantage generated at the time.
We were surprised that the government did not introduce the 5% reduction in the top rate of tax with effect from 6 April 2012, although this was honouring a promise not to make any change while public sector pay is frozen. However, reducing the rate with effect from 2013 provides an extended opportunity for deferring income into 2013/14. Interestingly, the Budget forecasts include a cost of £2.4bn in 2012/13, representing the tax revenues lost in that year as a result of deferring income into 2013/14 or beyond. HMRC appears to expect that income to be paid in the following two years, raising tax revenues of £900m in 2013/14 and £1.7m in 2014/15.
At least no specific anti-forestalling measures are proposed. Presumably this is due to the small amounts considered to be at stake. However, this assumes that deferrals will be short term. We think that the behavioural change resulting from the rate reduction is difficult to predict. Longer term deferrals are required by regulations in the financial services sector and, elsewhere, deferrals are increasingly popular given the potential for gross role up and possible further rate reductions.
Structuring deferrals to meet regulatory requirements and not to fall foul of the complex rules on disguised remuneration will be key. HR, technical and practical issues should also be considered e.g. which population(s) of employees should be offered deferrals without discrimination, and ensuring that the necessary documentation is effective to achieve the desired outcome.
The global mobility of businesses and their employees is another important factor to consider. The Chancellor made various references to the competitiveness of the UK's tax regime. A comparison of the top rates of income tax with some popular destinations suggests that a 45% top rate is now more comparable. We hope to see a return to 40% in the not too distant future in order to be truly competitive:
|Country||Top rate of income tax|
|US||42% (incl. NY state tax)|
Finally, it is worth noting that opportunities to achieve capital growth over income will remain attractive based on a rate differential of 19% (between income tax and national insurance contributions at 47% and capital gains tax of 28%).