Income tax: the additional 50p rate ( PDF, 41 pages ... - Parliament

Income tax : the additional 50p rate
Standard Note: SN249
Last updated: 28 June 2013
Author: Antony Seely
Business & Transport Section
In his 2009 Budget, the then Chancellor, Alistair Darling, announced several tax increases to
“raise over £6 billion by 2012, to secure our economic future and to provide help for people
now when they need it most.” These changes included increases in the rates of indirect taxes
– such as duties on road fuel and alcohol – for the current tax year, and changes to income
tax from April 2010, including a new 50p rate on incomes above £150,000. The new 50p
rate dominated reactions to the Budget, as many saw it as a significant change in the Labour
Government’s approach to taxing the wealthy. There was also much discussion as to
whether the change would raise as much as the Government anticipated: £1.3bn in 2010/11,
rising to £3.05bn in 2011/12. HM Revenue & Customs estimate that 236,000 individuals paid
the 50p rate in 2010/11, compared to the total taxpayer population of 31.3 million. 1
The new Conservative-Liberal Democrat Government did not mention the 50p rate in the
agreement underpinning the Coalition, though it announced that the personal allowance
would be increased in the forthcoming Budget “to help lower and middle income earners” as
the first of a series of “real terms steps each year” toward setting the allowance at £10,000. 2
In his first Budget speech on 22 June 2010, the Chancellor, George Osborne confirmed that
the personal allowance would rise by £1,000 to £7,475 from April 2011, while the Budget
report noted that the 50p rate would “remain in place for the time being.” 3 In his second
Budget on 23 March 2011 the Chancellor made no changes to the rates of income tax for the
coming year but underlined his view that the 50p rate “would do lasting damage to our
economy if it were to become permanent” and said he had asked HM Revenue & Customs to
review “how much revenue it actually raises.” 4
In his Budget on 21 March 2012 Mr Osborne announced that the department had found
evidence of considerable ‘forestalling’ – taxpayers shifting income into the previous tax year
to avoid the 50p rate “at a cost to the taxpayer of £1 billion.” He argued that “no Chancellor
can justify a tax rate that damages our economy and raises next to nothing” and so the rate
would be cut to 45p from April 2013. 5 The department’s assessment of the 50p rate was set
1
2
3
4
5
HC Deb 22 April 2009 c244; HC 451 March 2010 p140 (Table A11 : item l); HMRC, National Statistics:
Number of individual income taxpayers (Table 2.1), January 2013
HM Government, The Coalition: our programme for government, 20 May 2010 p30. See also, Income tax :
recent increases in the personal allowance, Library standard note SN6569, 25 March 2013
HC Deb 22 June 2010 c179; HC 61 June 2010 p32 (para 1.97)
HC Deb 23 March 2011 c957. See also, HC Deb 14 September 2011 c1191W
HC Deb 21 March 2012 cc805-6. The Government confirmed that the additional rate would be 45% for
2013/14 in the 2013 Budget (HC 1033, March 2013 para 1.202-3).
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out in a detailed report, which estimated that the cost of cutting the rate to 45p would be only
£100m by 2014/15, given the anticipated response by taxpayers to this change. 6
This note discusses the background to the 50p rate, the debate there has been, as to its
political significance and its economic impact, before looking at the Government’s decision to
cut this rate to 45p from April 2013.
Contents
1 Pre-Budget Report 2008 – the 45p rate 2
2 Budget 2009 – the 50p rate 7
3 First responses to the 50p rate 9
4 Debate on the potential yield of the 50p rate 13
5 The 2010 Budget 16
6 The Coalition Government’s approach 18
7 The 2012 Budget : cutting the rate to 45p 24
Appendix: Discussion of the 50p rate in the Mirrlees Review 40
1 Pre-Budget Report 2008 – the 45p rate
In his Pre-Budget statement on 24 November 2008, the then Chancellor, Alistair Darling,
announced a number of measures to “raise revenue in future years”; among the options to
raise funds, Mr Darling suggested that the ones he had chosen were “the fairest and affect
those who have done best out of the growth of the past decade”:
Today’s pre-Budget report shows that the tax burden, as a share of gross domestic
product, will fall from 36.3 per cent. last year to 35 per cent. in 2011-12. Against that
background, I propose from April 2011 to increase by ½ per cent. all rates of national
insurance contributions for both employees and employers.
To ensure that the increase does not fall on those on low or modest incomes, I have
decided, at the same time, to raise the starting point for national insurance to align it
with that for income tax, so that no one on under £20,000 will pay any more national
insurance contributions as a result. Secondly, those with the highest incomes have
seen their earnings almost double since 1996, so—again from April 2011—I intend,
only on income over £150,000, to introduce a new rate of income tax of 45 per cent.
This higher rate of tax will affect only the top 1 per cent. of incomes.
I also intend to withdraw the long-standing anomaly of the income tax system under
which the personal allowance is worth twice as much to higher-rate than to basic-rate
6
HMRC, The Exchequer effect of the 50 per cent additional rate of income tax, March 2012 pp 48-53. The
report estimated that the ‘static cost’ of this tax cut, with no allowance for any behavioural response, would be
£3.35 billion in 2014/15. See also, Budget 2013, HC 1033, March 2013 p66 (Table 2.2 – item t)
2

taxpayers. Again, I will protect those on middle incomes; this will affect only those
earning over £100,000—that is, the top 2 per cent. So from April 2010, those with
incomes between £100,000 and £140,000 will see the value of their personal
allowance reduced, so that they get the same benefit as basic-rate taxpayers. For
people with incomes above £140,000, I will withdraw the full value of that personal
allowance. 7
The Pre-Budget Report gave more details on each of these changes:
• The income tax personal allowance will be restricted for those with incomes over
£100,000 – the two per cent of people with the highest incomes – from April 2010,
when the economy is forecast to be growing. From that level of income, the
personal allowance will be reduced at a rate of £1 of allowance lost for every £2 of
income over that level until it is halved in value. At this value, the personal
allowance will be worth the same as for a basic rate taxpayer. From £140,000 of
income, the remaining allowance will be completely withdrawn at the same
withdrawal rate, so that people with the very highest incomes do not benefit from
the personal allowance;
• A new additional higher rate of income tax of 45 per cent (and 37.5 per cent for
dividend income) for those with incomes above £150,000 from April 2011. This will
ensure that people with the very highest individual incomes pay a greater share of
their income in tax; and
• A 0.5 per cent increase in the employee, employer and self-employed rates of NICs
from April 2011, alongside an increase above indexation in the point at which
individuals start to pay NICs – known as the primary threshold – so that it is aligned
with the personal allowance. This will ensure that the fiscal consolidation is broad
based, without affecting those over state pension age, who do not pay NICs. These
changes will be introduced from 2011, when the economy is forecast to be growing
above trend rates and real incomes are growing strongly.
The measures above mean that people with incomes below £40,000 will not pay more
income tax and NICs in April 2011 than in April 2008. People with incomes between
£40,000 and £100,000 a year will pay slightly more income tax and NICs, around £3 a
week on average. Those with incomes between £100,000 and £140,000 will pay
around £22 a week more on average in income tax and NICs, while those between
£140,000 and £200,000 will pay on average £61 a week, and progressively more as
income rises. 8
The report estimated that introducing the 45% rate – and raising the tax rate on trusts to 45%
- would raise £670m in 2011/12. Restricting the personal allowance for individuals with
incomes over £100,000 would raise £1.32bn in the same year. By contrast, increasing the
rates of NI by ½ a percentage point on employees, employers and the self-employed would
raise an estimated £5.4bn in 2011/12; raising the NI primary threshold, to align it with the
personal allowance would cost £1.6bn. 9
7
8
9
HC Deb 24 November 2008 c496
Cm 7484 November 2008 p85
Cm 7484 November 2008 p194 (Table B5). The yield from both the 45% rate and the withdrawal of the
personal allowance would be lagged due to self-assessment, and the Government estimated that for 2011/12
onwards, each measure would raise £1.6bn (Table B5 – footnote 3).
3

Much of the reaction to the PBR focused on the Chancellor’s announcement of a temporary
cut in VAT, as the centrepiece of a fiscal stimulus programme for the coming year. 10 That
said, Robert Peston, the BBC’s business editor, suggested that the income tax proposals
were “the first seriously redistributive tax changes since the 1970s … in a way, this Labour
government has ditched the cornerstone of Thatcherism, which is that those on highest
earnings will create wealth for the benefit of all of us if they’re allowance to keep as much as
possible of their respective incomes.” 11
Robert Chote, then director of the Institute for Fiscal Studies (IFS), argued that the decision
to withdraw the personal allowance for wealthier taxpayers was as important a change as the
new 45p rate, especially from the perspective of the incentives created by the tax structure
for people to change their behaviour:
The introduction of the new 45p income tax band on incomes above £150,000
understandably caught everyone’s attention, being the first increase in the highest
income tax band since 1974. The Treasury estimates that this will raise £1.6 billion in a
full year, although this has to be a very tentative guess. If more of these people declare
less taxable income, put more into their pensions, increase charitable giving or engage
in avoidance than the Treasury expects then it may raise less than it hopes.
Almost as important in revenue terms – and much less obvious to the naked eye – is
the impact of taking away the personal income tax allowance for people on high
incomes. This in effect creates two new 60% income tax bands for incomes between
£100,000 and £106,450 and between £140,000 and £146,450 for no obvious economic
rationale. This will create a very powerful incentive for people with incomes within
these bands to increase their pension contributions until their taxable incomes fall to
the bottom of the bands. 12
In an editorial the Financial Times noted the incentives the new higher rate would create,
going on to argue that, “there is a broader question of uncertainty too. After Labour won
three elections promising not to increase the top rate of income tax, plans for the first such
hike since 1974 prompts fears of further rises. Now that the commitment to stop at 40 per
cent has gone, why believe 45 per cent will be a sticking point?” 13 The Institute of Chartered
Accountants were strongly critical of the proposal, in their submission to the Treasury
Committee on the PBR:
The withdrawal of personal allowances at one pound for every two pounds of income
creates an effective additional tax rate of 20% in addition to the 40% income tax rate—
ie an effective tax rate of 60% at income levels just above £100,000 and £140,000.
This effect is demonstrated by the comparison of “Case A” and “Case B” in Table 1. as
follows:
10
11
12
13
For example, the Treasury Committee’s report on the PBR did not discuss any of these direct tax changes in
detail (Second report: Pre-Budget Report 2008, 28 January 2009 HC 27 2008-09).
“End of Thatcher’s tax incentives”, Peston’s Picks blog – BBC newsite, 24 November 2008
Opening remarks for post-PBR briefing – Robert Chote, IFS 25 November 2008 p3
“Leader: Fussy and feeble income tax rises”, Financial Times, 27 November 2008
4

This example demonstrates that income of £100 has resulted in a further tax charge of
£60, an effective marginal tax rate of 60% … the proposals introduce considerable
complexity into the income tax system and associated tax calculations and result in two
effective marginal rates of tax of 61%. This increased complexity contrasts with the
announcements in 2007 PBR designed to simplify the tax system, in particular the
introduction of a flat-rate of Capital gains Tax (CGT). The difference in rate between
the top rate of income tax (45%) and CGT (18%) is now 27%, further increasing the
incentive to ensure that returns are received by way of capital gains rather than
income. 14
By contrast, in their evidence to the Committee, the TUC, while concerned about the rise in
NICs, argued that restricting the personal allowance was “a very positive move, which
responds to a point made by the TUC for some time now that the progressive nature of our
tax system is undermined by excessive use of reliefs and allowances by the very wealthy.” 15
In their Green Budget published in January 2009, the IFS noted that there were considerable
difficulties in making accurate predictions as to the amounts of money these changes could
raise, since it “requires accurate information about income growth at the top of the income
distribution, the shape of the income distribution and the responsiveness of the very rich to
changes in their marginal tax rates. All of these are subject to a high degree of uncertainty.” 16
The Institute was also critical of the impact that withdrawing the personal allowance would
have on the schedule of marginal tax rates; the two narrow income bands over which the
allowance was withdrawn, the effective marginal rate, expressed as a percentage of
employer cost, would be 66%:
This is calculated by adding together the income tax rate, employees’ NI rate and
employers’ NI rate and dividing by 1 plus the employers’ NI rate, in this case (0.45 +
0.015 + 0.133)/1.133. This is because increasing gross earnings by £1 leads to
additional income tax liability of 45p, additional employees’ NICs of 1.5p and additional
employers’ NICs of 13.3p and the total cost to the employer has increased by £1.133.
This therefore gives the proportion of an extra pound that an employer spends
employing someone that is taken in income … It is possible that an optimal tax
schedule does involve a lower marginal rate at the very top of the income distribution
than slightly lower down … This might be the case if those at the very top of the
income distribution were more responses to changes in their marginal effective rate ....
However …. it seems unlikely that it would figure the two large spikes in the marginal
17
rate schedule that the government is proposing.
14
15
16
17
HC 27 2008-09 Ev81-2
HC 27 2008-09 Ev88
Green Budget 2009, January 2009 p213
Green Budget 2009, January 2009 p216, 218, 226
5

Just prior to the 2009 Budget, the IFS published a follow-up report on the potential response
of taxpayers, drawing on correspondence with the department, and earlier research on the
responses of wealthy taxpayers when the highest income tax rates were last changed in the
late 1980s. The research was highly technical, but, very briefly, the authors looked at the
relationship between marginal tax rates, and the income share of the richest 1% of adults,
over the period 1962-2003. 18 As they observe, the UK experienced a dramatic drop in the
marginal effective tax rates (METRs) 19 on the highest incomes during the 1980s, which
makes it a particularly valuable period to study: “up to 1978, the top METR on earnings was
83%. Under the Thatcher administrations, the top rate dropped to 60% in 1979, and then
dropped further to 40% in 1988.” Assuming an underlying consistency in the way individuals
and firms respond to marginal tax rates, the authors go on to suggest that raising tax rates
on the highest earners would be unlikely to provide an effective method of raising revenue:
The way that incomes have responded to the large changes in top marginal tax rates
over the past 40 years suggests that if the richest 1% see a 1% fall in the proportion of
each additional pound of earnings that is left after tax, then the income they report will
rise by less than half that - only 0.46%. [The term used for this is taxable income
elasticity.] Although a tentative estimate, this suggests that the government would
maximise the revenue it collects by imposing an overall marginal rate on the highest
earners of 56.6%, very close to the 53.0% currently charged in the UK (including
income tax, national insurance contributions and indirect taxes). So there does not
seem a powerful case for increasing the income tax rate on the very highest earners,
even on redistributive grounds - it would not generate much if any extra revenue to
transfer to the less well off. 20
It is worth adding that the authors emphasized that their estimates of this behavioural
response was subject to a great deal of uncertainty – from the paucity of the data they used,
and the fact that this period in the 1980s, not only was the top rate of tax was falling, but
income inequality was increasing as well. As a consequence, this analysis might “confuse
responses to the policy with any underlying factor increasing income inequality, and this
might mean the estimated elasticity is too high.” 21
In the course of their work, the IFS made an FOI request to the Treasury about its
calculations in the 2008 PBR, about the impact of the new 50p rate: in brief, the department
used a figure for taxable income elasticity set at 0.35% - rather than the IFS’ figure of
0.46%. 22 During the Committee proceedings of the Finance Bill the then Financial Secretary
Stephen Timms stated that in doing so, Treasury officials had looked at the work on the UK
experience in the 1980s, and “academic evidence available for a range of other countries,
the USA in particular.” He went on to argue that two changes in the Government’s approach
to tax avoidance in the last few years that would have been “likely to have had a downward
impact on taxable income elasticity in the UK;” 23 namely,
18
19
20
21
22
23
Mike Brewer, et al., Means-testing and tax rates on earnings: Prepared for the Report of a Commission on
Reforming the Tax System for the 21st Century, April 2008
The marginal effective tax rate (METR) measures how much of a small rise in gross earnings is lost to
payments of tax and reduced entitlements to benefits.
Means-testing and tax rates on earnings … April 2008 p15, p1
Mike Brewer & James Browne, Can more revenue be raised by increasing income tax rates for the very rich?,
IFS briefing note BN84, April 2009 p6
IFS briefing note BN84, April 2009 p7
Public Bill Committee (Finance Bill) 21 May 2009 cc89-90
6

• The ‘Disclosure Regime’, introduced in the 2004 Budget: a scheme which requires
accountancy firms and other practitioners to disclose any new direct tax avoidance
schemes to the revenue departments. 24
• The threat of retrospective legislation made by the then Paymaster General, Dawn
Primarolo, in the 2004 PBR: that to “deal with any arrangements that emerge in future
designed to frustrate our intention that employers and employees should pay the
proper amount of tax and National Insurance contributions (NICs) on the rewards of
employment”, the Government would be willing to introduce legislation to counter any
avoidance scheme that subsequently came to light, “where necessary” with effect
from the date of the PBR. 25
The IFS re-examined the department’s estimates in a chapter on the 50p rate in their 2012
Green Budget; 26 the authors’ conclusions are discussed below, but it is worth noting two
points that underline the uncertainty surrounding these numbers: first, no allowance is made
by the Treasury for any impact on revenues from indirect taxes – as, say, the responses of
those affected by the 50p rate results in a drop in their expenditure, and thus a drop the
Exchequer’s VAT receipts. Second, the Treasury do not factor in any possible ‘fiscal
externalities’ from behavioural responses, counteracting the first of these effects. Efforts by
taxpayers to postpone paying the 50p rate might mean more tax was collected at a later
date; decisions to take remuneration in the form of capital rather than income might boost
receipts from capital gains tax. All told, as the IFS observe, “the truth is that there remains a
great deal of uncertainty over the revenue-maximising top income tax rate.” 27
2 Budget 2009 – the 50p rate
In his Budget speech on 22 April 2009 the then Chancellor, Alistair Darling announced two
important revisions to his earlier proposals for income tax increases on the very rich:
I am not proposing to increase taxes on income for this year. However, as the
economy recovers and wages start to grow again, it is right that we take additional
steps. I believe that it is fair that those who have gained the most should contribute
more. Only those with incomes over £100,000 a year—or 2 per cent. of the
population—will be affected.
In November, I announced a new rate of income tax of 45 per cent. on incomes above
£150,000—the top 1 per cent. of taxpayers. In order to help pay for additional support
for people now and to invest in the future, I have decided that the new rate will be 50
per cent., and will come in from April next year—a year earlier. In November, I also
announced that I was reducing personal allowances for the very highest earners with
incomes over £100,000. These allowances are worth twice as much as those of basic
rate taxpayers. I have now decided to withdraw fully the benefit of that allowance for
24
25
26
27
Similar rules were introduced for businesses that used or marketed VAT avoidance schemes. The Regime
has been extended to National Insurance contributions, stamp duty land tax & inheritance tax. HMRC’s site
gives full details of the regime at: http://www.hmrc.gov.uk/aiu/index.htm
HC Deb 2 December 2004 cc44-6WS. Another Library standard note discusses these initiatives in more detail:
Tax avoidance: a General Anti-Avoidance Rule (GAAR) – background history, SN2956, 26 July 2012.
“Chapter 9: the 50p income tax rate: what is known and what will be known?”, in, The IFS 2012 Green Budget,
February 2012 pp 180-196.
op.cit. p193
7

those with incomes over £100,000 from next April. These measures are necessary to
build our recovery and secure our country’s economic future. 28
Details of the new income tax structure from 2010 were set out in a Budget note:
For 2009-10, there are two main rates of income tax. The 20 per cent basic rate of
income tax applies to taxable income up to £37,400. The 40 per cent higher rate
applies to taxable income above £37,400. From April 2010, a 50 per cent additional
rate of tax will apply to taxable income above £150,000.
From 2010-11 there will be three rates of tax for dividends. Dividends otherwise
taxable at the 20 per cent basic rate will continue to be taxable at the 10 per cent
dividend ordinary rate and dividends otherwise taxable at the 40 per cent higher rate
will continue to be taxable at the 32.5 per cent dividend upper rate. Dividends
otherwise taxable at the new 50 per cent additional rate will be taxable at a new 42.5
per cent dividend additional rate. From 2010-11, the dividend trust rate will be
increased from 32.5 per cent to 42.5 per cent and the trust rate will be increased from
40 per cent to 50 per cent.
The basic personal allowance provides an amount of tax free income. All individuals
entitled to the basic personal allowance receive the same amount. From 2010-11, the
basic personal allowance will be subject to a single income limit of £100,000. Where an
individual’s adjusted net income … is below or equal to the £100,000 limit, they will
continue to be entitled to the full amount of the basic personal allowance.
From 2010-11, where an individual’s adjusted net income is above the income limit of
£100,000, the amount of the allowance will be reduced by £1 for every £2 above the
income limit. The personal allowance will be reduced to nil from this income limit
instead of the two-stage reduction announced at the Pre-Budget Report.
“Adjusted net income” is the measure of an individual’s income that is used for the
calculation of the existing income-related reductions to personal allowances those
aged between 65 and 74, and for those aged 75 and over. Adjusted net income is
calculated in a series of steps. The starting point is “net income” which is the total of
the individual’s income subject to income tax less specified deductions, the most
important of which are trading losses and payments made gross to pension schemes.
This net income is then reduced by the grossed-up amount of the individual’s Gift Aid
contributions and the grossed-up amount of the individual’s pension contributions
which have received tax relief at source. The final step is to add back any relief for
payments to trade unions or police organisations deducted in arriving at the individual’s
net income. The result is the individual’s adjusted net income. 29
The department also published a number of worked examples to show how the new 50%
rate, and the tapering of the personal allowances, would work in practice. 30
At this time it was estimated that the new 50p rate on earnings above £150,000 would raise
£2.5bn by 2011/12, and the withdrawal of the personal allowance from individuals with
28
29
30
HC Deb 22 April 2009 c244
HM Revenue & Customs Budget Note BN01, 22 April 2009. Emphasis added.
The examples used the 2009/10 figure of personal allowance and basic rate band; as it transpired both were
frozen for the 2010/11 year. (HM Revenue & Customs, Additional Rate of Income Tax and Income Related
Reduction of the Personal Allowance from 2010 -11 Supplementary Note and Examples, 23 April 2009).
8

incomes above £100,000 would raise £1.4bn in the same year. 31 At the time of the 2010
Budget these estimates were revised upward: to £3.1bn, and £1.47bn, respectively. 32
The one other measure in the 2009 Budget estimated to raise equivalent sums was the
proposal to increase the main duties on road fuel: first, by 2p a litre on 1 September 2008,
and then, by 1p per litre in real terms on 1 April each year from 2010-3. It was estimated that
these increases would raise £1.75bn by 2011/12. By way of comparison, at this time it was
estimated that changing the basic rate of tax by 1p would raise £3.9bn in 2011/12. 33
Finally, the Chancellor also announced proposals to restrict higher rate relief on pension
contributions made by individuals with incomes over £150,000 from April 2011. One reason
to do this was to counteract the impact that the new 50p rate would have on the value of tax
relief on contributions for those liable to the additional rate. The method chosen by Mr
Darling to restrict relief was strongly criticized by the pensions industry, and the Coalition
Government introduced provisions in the Finance Act 2011 to restrict relief in a simpler
fashion while raising an equivalent sum of money. 34
3 First responses to the 50p rate
The Chancellor’s announcement of a new 50p rate dominated initial reactions to the Budget.
Many commentators argued this marked a significant change in the Labour Government’s
approach to personal taxation; that said, while the 50p rate had an important symbolic value,
the projected revenues from this measure were small, in the context of the ballooning size of
the public deficit. The Guardian’s economics editor, Larry Elliott, put it this way:
Having told us a year ago that the budget deficit would be £38bn in 2009-10, Darling
revised the figure up to £118bn in the pre-budget report in November and to £175bn
yesterday. That represents a deterioration of £137bn. In total, the new 50% tax rate,
scrapping tax allowances and restricting tax relief on pensions will raise, at best, £7bn.
Bringing the deficit down to more manageable levels will require years of implausibly
high growth, a squeeze on public spending even more severe than during the Thatcher
years and, after the election, widespread tax increases. 35
An editorial in the paper commented that these measures were “a commendable attempt to
share the pain – but it will not do much to plug the yawning gap in the public finances, seeing
as it was not combined with measures on property or capital.” 36 In the Independent, Hamish
McRae said, “leaving aside the breaking of the New Labour covenant on tax rates, it is plain
stupid to make a change that brings in less revenue, not more. If you need more revenue
you have to be honest and acknowledge that it must come from higher basic rate income tax
and higher VAT.” 37 Similarly the Economist observed that the changes “will irritate the 1-2%
31
32
33
34
35
36
37
These estimates took into account the revenue raised from the 2008 PBR proposals, along with the Budget
2009 changes: HC 407 April 2009 pp153-4 (Tables A1 & A2; also Table A1 – footnotes 2&3).
Budget 2010 HC 451 March 2010 p140. These estimates were also given in a written answer several months
later on the projected yield of the 50p rate (HC Deb 24 November 2010 c367W).
HMRC, National Statistics: Table 1.6 (Direct effects of illustrative tax changes), December 2011
For details see, Restricting pension tax relief, Library standard note SN5901, 17 December 2012.
“Labour’s leaving present”, Guardian, 23 April 2009
“Editorial: Budget – cost of a crisis”, Guardian, 23 April 2009
“Age of New Labour draws to a close with deceit and dishonesty”, Independent, 23 April 2009
9

of taxpayers affected; but it will hardly solve the problem. That will require broader, more
painful measures in the medium term.” 38
In an editorial the Times argued, “the Chancellor has not simply increased the top rate to 50
per cent, he also moved the starting date to within this Parliament in direct breach of a
central manifesto pledge. As the birth of this pledge [in the 1997 general election] was
symbolic, so is its death.” The paper was also doubtful as to the amounts of money that
would be raised by the new rate:
The decision to raise the top rate of tax to 50 per cent will punish some bankers, but
will simply send others scurrying to Geneva. The vast majority of the 350,000 people
earning more than £150,000 will, of course, stay in the UK. They will not complain.
They will call their accountants. A higher rate of tax is likely to generate much less
revenue than the Treasury hopes, and much more avoidance. But Mr Darling is also
guilty of tax avoidance. His Budget sidestepped the central issue of the public finances:
it answered the problem of future spending with a commitment to future borrowing but
no clear or plausible route to reducing debt. 39
The leader in the Financial Times went further to argued that “the plans to raise taxes on the
rich … are not about raising money”:
The most striking measures [in the Budget speech] were undoubtedly the plans to
raise taxes on the rich. … There is force in the argument that a government needing to
raise revenue should focus on those who have more money rather than those who
have less. A fair tax system must be progressive. But the more a country raises money
from a small number of rich people, the fewer of them it will find it has. Raising serious
revenue requires a broad tax base, not an assault on a small minority of high earners.
But these rises are not about raising money: indeed, the Institute for Fiscal Studies has
argued that the current top rate of 40 per cent was the revenue-maximising rate, and
that the planned increase would cost the exchequer rather than help plug the hole.
These tax plans exemplify the relentlessly tactical nature of yesterday's Budget - a
mixture of populism and procrastination. Perhaps it is too much to hope for a strategic
approach in the run-up to an election. But the Budget has at least set out the clear
division between the main political parties over how to share the pain of getting public
finances into shape. Now we need a truthful debate about what this should entail,
including what activities the state undertakes that it should cease to perform. Credible
politicians must engage with this argument. 40
Writing in the Times, Anatole Kaletsky argued that the new 50p rate was “a pointless and
unexpected gamble”:
The announcement of any significant tax increase, at a time when the Chancellor was
trying to restore business confidence and boost housing and consumption, went
completely against the logic of efforts of the Government's faith in fiscal stimulus … [In
addition] by accelerating his tax plans, the Chancellor has probably delayed and
weakened the recovery that the Treasury is expecting this year ... Third, and most
alarmingly, Mr Darling's tax increase has kicked the most cyclically important part of
the British economy when it is already down … in today's more cost-conscious
38
39
40
“Leader: Desperate Measures”, Economist, 25 April 2009
“Leader: The avoidance Budget”, Times, 23 April 2009
“Leader: Too frail and vague to shore up credibility”, Financial Times, 23 April 2009
10

environment, banks and multinational companies will be sorely tempted by the neardoubling
of net pay that they can achieve for their employees simply by moving out of
Britain before Mr Darling's new taxes and national insurance charges are imposed. 41
Nevertheless, opinion polls carried out after the Budget found widespread public support for
the new 50p rate. The Times reported on a poll by Populus which showed 57% of
respondents welcoming the change, with 22% against. This contrasted with reactions to the
rises in fuel duty rates: with just 20% in favour and 68% opposed. 42 Commenting on the
apparent mismatch between the responses of editorial writers and newspaper readers to the
50p rate, the Guardian suggested that this was “partly a case of self-interest … [but also] a
more general failure on the part of the elite to grasp how exceptionally rich someone on
£150,000 … really is.” 43
Provision to allow the new additional 50p rate to be applied from April 2010 was included in
the Finance Act 2009 (section 6). Income tax is an annual tax re-imposed each year by
Parliament (even if the proposed rates are the same as for the previous year), so that the
Government anticipated that the Finance Bill the following year would introduce the charge to
income tax for 2010/11, and set the additional rate, along with the basic and higher rates of
tax. At the conclusion of the Committee debate, Sir Nicholas Winterton, Chairman of the
Committee, explained that it was appropriate for the Bill to include this clause, though it did
not provide exactly when the higher rate would come in: “The clause, in my estimation and
on the advice that I have taken, is the setting of a top rate of tax, without specifying that top
rate of tax, which could come in future legislation.” 44
The 50p rate was mentioned a few times by Members during the second reading of the Bill
on 6 May 2009. Justifying the change the then Chief Secretary to the Treasury, Yvette
Cooper, said, “we think that it is fairest for those on the highest incomes to contribute more
because over the past 10 years their incomes have increased by an average of £5,000 a
year, compared with £600 a year for the average taxpayer.” 45 Robert Syms took issue with
the amount of money that this additional contribution might raise:
If we are honest, the only way to raise an awful lot of tax revenue is to raise tax on
ordinary working people, not on a particular section of people. High tax rates might
make a debating point, but the reality of the Government’s policy of raising the higher
tax rates, restricting allowances and restricting what people can do with pensions is
that people will look for others ways to recompense themselves. They might forgo
salary in the short term or look for other ways, such as capitalising their salary. 46
The then shadow Chief Secretary, Philip Hammond, criticised the change as a “political
gesture” which would create “a yet more complex system of taxation.” Mr Hammond was
also concerned about the associated increase in the tax rate on trusts:
41
42
43
44
45
46
“Bad economics, timing and politics: but a good impression of Mr Bean”, Times, 23 April 2009
“Tax rise at the top wins applause as Brown denies the death of new Labour”, Times, 24 April 2009
“Middle England welcomes 50p tax for high earners”, Guardian, 25 April 2009
Public Bill Committee (Finance Bill) 21 May 2009 c95. The Act also contained provision for the tapering of the
personal allowance from individuals with incomes over £100,000 (section 4).
HC Deb 6 May 2009 c184
HC Deb 6 May 2009 c236. The Financial Times soon reported this trend in tax planning (”Investors seek to
shift away from tax traps”, 2/3 May 2009).
11

In aligning the trust tax rate with the new, higher 50p rate, HMRC made the
assumption that all beneficiaries of trusts are people who are likely to be subject to the
top rate of income tax. That is simply not the case. Although it may have been a
broadly reasonable assumption when the top rate of tax was 40 per cent., it is an
unreasonable assumption when the top rate of tax affects only those people with an
income of more than £150,000. There will be many beneficiaries of trusts with incomes
far below the £150,000 threshold whose income will now be subject to tax at the 50 per
cent. rate. That undermines still further the legitimate use of trusts, and should be
carefully considered. 47
Winding up the debate the then Financial Secretary, Stephen Timms, responded to this
point:
Rates were aligned in 2004 to prevent avoidance of the higher rate by routeing income
through a trust. The trust rate will be increased in line with the higher rate, so we are
not opening up opportunity for trusts to be used for avoidance. Those for whom the
lower rate is appropriate can reclaim tax; many do so already. In the case of selfassessment,
that will happen automatically. If, as was suggested, the trust is for a
vulnerable beneficiary or a bereaved child, for example, an election can be made
under the vulnerable beneficiary legislation, which has a special tax regime. 48
Similar points were raised when these provisions were debated at the Committee stage of
the Bill. The Financial Secretary explained why the Government had changed its proposals
since the PBR in November 2008:
As you will recall, it was announced in the pre-Budget report in November that we
would be introducing a 45 per cent. rate in April 2011. However, the global downturn
has been worse than predicted and, as a result, more consolidation is required. That is
why the additional rate has been brought forward and raised by five percentage points
to 50 per cent … We have thought very carefully about how the further money required
for fiscal consolidation should be raised. We are clear that it is right to require those
who benefited most in the last decade and who are in the best position to pay to
contribute more. That is the basis for the clause. 49
Speaking for the Conservatives, Greg Hands suggested that “the new tax rate’s
implementation is largely the result of political posturing.” He raised concerns that the
change of policy between the 2008 PBR and the 2009 Budget had undermined the UK’s
reputation as having a ‘predictable and stable’ tax code, and questioned whether the new
rate would raise as much as predicted, especially as it would increase the differential
between the highest rate on income tax, and the rate of capital gains tax. 50
Jeremy Browne, speaking for the Liberal Democrats, took issue with what he termed the
‘ethical’ case for the 50 rate, that, “it was only right that the people who benefited from
economic growth should pay more now that the economy is shrinking”:
First, those who are earning the most money already contribute a much bigger
percentage of the total national income tax take than their numbers would otherwise
47
48
49
50
HC Deb 6 May 2009 cc197-8. The Chartered Institute of Taxation also argued the increase in the trust rate is
“punitive, forcing distribution of income” (CIOT Budget 2009, 1 May 2009 p1).
HC Deb 6 May 2009 cc310-11
Public Bill Committee (Finance Bill) 19 May 2009 c45, c48
PBC 19 May 2009 c49, c61, c67
12

indicate. One could argue that they should contribute more or that they should
contribute less, but it is misleading to suggest that the top 1 or 2 per cent. of earners
are not contributing in a substantial and meaningful way to the public finances; they
most certainly are. Secondly, one should not necessarily assume that people who will
be earning in excess of £150,000 from next year onwards benefited during the period
of economic growth. 51
4 Debate on the potential yield of the 50p rate
At their briefing after the 2009 Budget, Robert Chote, then director of the IFS, put the
changes to income tax on the wealthy into some context:
Much attention has focussed on the income tax increases on the rich, which the
Treasury hopes will raise £7 billion a year. Even if this estimate is correct, the gain will
partly be offset by losses of VAT and other indirect tax revenues buried in other Budget
forecasting changes. We should also bear in mind that increases in fuel duty and
National Insurance will raise a roughly similar amount – and from a much broader
range of families. And all the tax increases announced to date will in total raise only
about 10% of the money the Treasury is looking for by 2017–18. So the main burden of
the looming tightening – at least over the next few years – is likely to fall on the users
of public services. 52
In a presentation on the Budget changes to direct taxes and benefits, Stuart Adam of the IFS
noted that there was “huge uncertainty about how much people will reduce their taxable
income in response”, observing that they might “work less, retire earlier, emigrate, contribute
more to [a] pension or charity, convert income to capital gains, incorporate, [or] invest in tax
avoidance.” Moreover the Treasury’s estimate that the 50p rate would raise £2.4bn ignored
any effect on consumer spending, and the consequent fall in indirect tax revenues. 53
In its submission to the Treasury Committee on the Budget, the Institute of Chartered
Accountants noted the IFS’ work on this issue, saying “given the weight of evidence that
such rates may not be effective in raising revenue, we [are of] the view that a detailed
economic analysis of the impact of the proposed 50% tax rate needs to be made, before any
such policy is implemented.” 54 For its part, the Committee heard evidence from the Treasury
that it anticipated that individuals would be relatively successful in reducing their liability to
the new rate; Mike Williams (Director, Personal Tax and Welfare Reform) explained the
department’s modelling of these behavioural changes as follows:
The modelling exercise assumes that of the total theoretical yield that you would get
from the extra 10 percentage points from 2011-12 onwards that we would get about
31% of that ... What it is about is of the total extra theoretically obtainable the best
estimate made, taking into account behaviour, is that we will get just over 30% of that
… If you take the costing in two parts, first, you look at how many people there will be
with incomes above, say, £150,000 in 2011-12 and apply the 50% rate, where you
51
52
53
54
PBC 19 May 2009 c72
Reactions to Budget 2009 : Opening remarks - Robert Chote, IFS 23 April 2009. The Budget projections for
2009-10 from VAT and corporation tax were £8.8bn & £7.7bn lower than those made in the 2008 PBR (HC
407 March 2009 p231).
IFS Budget 2009 : Direct taxes and benefits - Stuart Adam, IFS 23 April 2009. On this theme see, “Ten ways
to survive high-tax Britain”, Sunday Times, 26 April 2009.
ICAEW Tax Faculty, 2009 Budget Submission TAXREP 14/09, March 2009 p2
13

were previously applying the 40% rate, and that gives you one figure, the maximum
theoretically obtainable figure. What is scored and what we think is the best estimate
after behaviour from 2011-12 onwards is 31%, but just to clarify yet further, because of
course there is interaction with the pensions tax measure 55 , if you then take into
account the pensions tax measure that in itself acts to reduce the behavioural effect
from the 50% rate and if you take the two together, which you can choose to or you
can deal with them separately, that takes the behavioural effect down so the yield goes
up to about 38%. 56
When the then Chancellor, Alistair Darling, appeared before the Committee, he was asked if
this apparently high-level of avoidance might not undermine public support for the measure;
he responded by saying:
Tax-planning has been with us, presumably, since the beginning of the 19th Century
when, you will remember, income tax was introduced on a temporary basis during the
Napoleonic Wars and, I dare say, ye olde tax planners have been doing a roaring trade
ever since. It is perfectly legitimate for people to tax-plan. They are only obliged to
render unto Caesar what is due to Caesar and that has always been a feature of their
case. What I tried to do here though, I am raising revenue both in indirect taxes and
from next year from those earning over £100,000 in direct taxes, and of course I will
always be vigilant about loopholes and indeed we announced various measures in the
Budget there. I think the answer to your question is that to dig up the entire system at
the present time would have been, I think, difficult to justify. 57
At an earlier point in these exchanges, Mr Darling said:
If you see the yield that comes in from those measures, and this one, I think, is about
£2.4 billion when it is there totally, it is quite a substantial sum of revenue. All I would
say to people who tell me they do not want me to do it is, “Okay, so what else are you
suggesting? Where else would you go?” There is no getting away from the fact that we
do need to take steps to deal with the result of the fact of our corporate tax revenues,
which could well come back in years to come, which, for as long as banks do not make
any money, they will not be paying any taxes. 58
Mr Darling was also asked why he had chosen to set the additional rate at 50p on incomes
over £150,000:
You ask me why I chose the level of £150,000 and that was simply my judgment. I had
to balance reluctantly, if you like, because, having spent the best part of 10 years in a
government that had essentially two rates of tax, I think it is important that we are
competitive, but in the present circumstances, and other governments are going to be
confronted with this, we need to take action to support our economy and also to live
within our means, and I thought this was a fair thing to do. 59
For its part the Committee raised serious concerns about the way in which the new structure
had been designed, and the amounts of money that it could reasonably be expected to raise:
55
56
57
58
59
[As mentioned above, Budget 2009 also announced the tapering of tax relief on pension contributions for
individuals with incomes above £150,000.]
Eighth report: Budget 2009, 6 May 2009 HC 438-II 2008-09 Q219 Ev30
HC 438-II 2008-09 Q343 Ev45
HC 438-II 2008-09 Q338 Ev 44
HC 438-II 2008-09 Q336 Ev 43-4
14

We … recommend that the Treasury, in the 2011 Pre-Budget Report, should report on
the revenue raised, both nominally and as a percentage of the theoretical maximum
revenue, by the new top rate of income tax. We also recommend that the Treasury
assess at that time the yield obtained from the higher rate against its disadvantages. If
the higher rate were to be continued it would be appropriate to consider what further
reforms would be needed to prevent further leakage of potential revenue from this
measure. The Treasury should indicate if it would revise the rate in the event that the
estimated revenue yield fell well below their forecasts. 60
The Government published its response to the report in July 2009, and made the following
remarks in answer to this point:
The costings of the 50 per cent income tax rate are based on careful assessment of
the impact, including any behavioural responses, on all relevant receipts and revenues.
As the Government has made clear to the Treasury Select Committee, the
Government has accounted for a proportion of high income individuals using various
methods to reduce their tax and NICs liabilities. The Government believes that this
represents a fair estimate of the impact of this measure. The Government is committed
to ensuring that everyone continues to pay their fair share whatever their income. As
with all taxes, the Government will keep the additional rate under review. HM Revenue
and Customs update each year income tax information contained on their website. 61
In November 2010 the IFS published the draft conclusions to a major review of the UK tax
system, which had been chaired by Sir James Mirrlees. In their discussion of the taxation of
earnings, the authors reviewed the work done by IFS researchers on the potential yield of the
50p rate, and the debate over a revenue-maximising top rate – but went on to argue that the
significance of the 50p rate lay less in the “paltry sum it might raise (or cost)”, but more in
what it represented about wider attitudes about wealth and inequality:
Tax rises impose losses on those affected even if they raise no revenue: those who do
pay more lose out financially, while those who change their behaviour to avoid the tax
are still somewhat worse off—otherwise they would have changed their behaviour
even in the absence of the tax. If we put any value at all on the extra satisfaction the
rich derive from becoming even richer, the revenue-maximising tax rate will be too
high. On the other hand, if we find extreme affluence so abhorrent that it is worth
making the rich worse off even if it raises no money—indeed, worth making the rest of
the population slightly worse off in order to make the rich significantly worse off—then
the revenue-maximising tax rate will be too low.
Such considerations are particularly pertinent because, around the revenuemaximising
tax rate, even sizeable changes in tax rates would have little impact on
revenue, yet still impose significant losses on those affected. Society’s attitude to those
losses is therefore as important as the precise revenue effect. The significance of the
50% income tax rate is less the paltry sum it might raise (or cost) than the substantial
hit on high earners it represents. 62
A longer extract from the final report, which was published in September 2011, is reproduced
at the end of this note.
60
61
62
HC 438-I 2008-09 para 100
Fifth special report, 10 July 2009 HC 890 2008-09 p12
“Chapter 4: Reforming the Taxation of Earnings in the UK” in, Tax By Design: the Mirrlees Review (Preliminary
version), November 2010 pp 35-7
15

5 The 2010 Budget
Following the 2009 Budget, and debates over the new 50p rate, there were a series of press
reports of companies paying employees ahead of time to miss the new 50p rate, 63 of the tax
authorities signalling their determination to crack down on any new avoidance schemes, 64
and accountants suggesting that many entrepreneurs and financiers were considering
leaving the UK. 65 On this last point, it is notable that a survey of the banking sector after the
new rate came in found little evidence of any exodus of senior executives to low tax havens
in Geneva or Zurich, for the simple reason that typically they could still earn twice as much in
London after tax, such was the relative size of London’s financial market. 66
That said, over the next months the focus of public attention moved on to wider concerns: the
severity of the economic recession, the continuing decline in the public finances, and the fact
that whichever government took power after the 2010 General Election, it would have to
consider much larger tax increases or major cuts in public spending, or, most likely, both.
In their Green Budget, published in February 2010, the Institute for Fiscal Studies looked at a
wide range of possible tax increases and benefit cuts that might be implemented to reduce
the size of the public deficit. Income tax is the largest tax in terms of the money it raises for
government; taken with the other two big taxes - VAT and National Insurance – these three
raise about 60% of all Exchequer revenues. Indeed, changes to these taxes would raise
very large sums: 1% of national income (£15.4 billion in 2011/12 terms) could be raised by a
3 percentage point rise in the basic and higher rates of tax (to 23% and 43%). In their
discussion of this, and other possible revenue-raising changes to income tax, the authors
explained, “we do not consider increasing the 50p ‘additional’ tax rate, which will apply above
£150,000 from April 2010, as previous research has shown that, at best, very little additional
revenue could be expected to be raised from doing so.” 67
In his 2010 Budget speech the then Chancellor, Alistair Darling, simply confirmed the
introduction of the 50p rate, along with a number of other pre-announced tax increases
aimed at those on higher incomes:
First, on taxes, I have already made difficult decisions, and I have been guided by our
values of fairness and the need not to undermine the recovery. The one penny
increase in the main rate of national insurance contributions will not affect anyone
earning under £20,000 a year; nor will it come into effect until April next year, by which
time I expect that the recovery will be stronger and more secure. The 50 per cent. rate
of income tax will come in next month, but it affects only those with earnings over
£150,000 a year-the top 1 per cent. of earners. For people with incomes over £100,000
a year-the top 2 per cent.-we will gradually remove the value of their personal
allowances. Tax relief on pensions will be restricted from next year, but again only for
those with incomes above £130,000 a year.
63
64
65
66
67
For example, “Taxman loses as dividends spring forward”, Financial Times, 6/7 March 2010
“Revenue warns high earners of tax avoidance crackdown”, Financial Times, 8/9 October 2009
For example, two Financial Times reports: “Accountants warn of 50% tax exodus”, 19/20 September 2009 &
“Tax rise may spark entrepreneur exodus”, 5/6 December
“Banking exodus fears on 50% tax overdone”, Financial Times, 17 May 2010
The IFS Green Budget, February 2010 p135, p138
16

Among all the tax rises since the beginning of this global crisis, 60 per cent. of them
will be paid for by the top 5 per cent. of earners. We have not raised these taxes out of
dogma or ideology; we are determined to ensure that our overall tax regime remains
competitive. But I believe that those who have benefited the most from the strong
growth in incomes in the past years should now pay their fair share of tax. I have no
further announcements on VAT, on income tax or on national insurance rates. 68
Provision for the 50p rate was included in the Finance Bill, published at the end of the Budget
debates on 30 March. 69 The Bill was relatively shorter than usual, to take account of the fact
that there would be a limited amount of Parliamentary time available before the General
Election. As it transpired, the date of the Election was announced just a few days later, with
the Dissolution of the House set for 12 April. This left 2 days of Parliamentary time for the
conclusion of all legislative business, and the Finance Bill was debated, and approved, in its
entirety in three hours on 7 April – with little reference being made to the new income tax
structure. 70
The three major parties made no mention of any further changes to the new higher rate
during the Election campaign. 71 For their part, the Conservatives stated that they did not
“regard the new 50p tax rate as a permanent feature of the tax system” but that they would
not “abolish it for the rich while at the same time asking many of our public sector workers to
accept a pay freeze.” 72 In addition, the party made no mention of increasing the £150,000
threshold in line with inflation or earnings.
By way of comparison a written answer in the Lords in January 2010 provides some figures
for the top rates of tax in the other G7 countries: 73
Asked by Baroness Valentine: To ask Her Majesty's Government how the top rate of
United Kingdom income tax compared with other G7 countries in (a) 2000, and (b)
2010; and what plans they have to address that aspect of the United Kingdom's
competitiveness.[HL5928]
The Commercial Secretary to the Treasury (Lord Sassoon): Top marginal tax and
social security rates are not necessarily representative of the total burden of taxation
on earnings, which depend on the income thresholds at which these rates apply as
well as the burden of employer social security contributions.
Tax wedge data offer a more comprehensive measure of the total burden of taxation
on earnings, as they account for both of these considerations. G7 tax wedge data for
high income individuals are not immediately available for 2000 and 2010. However, a
limited range of data is published by the OECD in its annual Taxing Wages document
(latest edition published May 2010-http://www.oecd.org/dataoecd/19/13/45118806.pdf).
As of April 2010, the top rate of income tax in the UK is 50 per cent. This rate was
introduced by the previous Government, and will remain in place for the time being.
However, we believe that high marginal tax rates are not good for the UK and we will
68
69
70
71
72
73
HC Deb 24 March 2010 cc255-6
It is now set out in s1 of the Finance Act 2010.
HC Deb 7 April 2010 cc 1058-1105. In the very short Committee stage debates, the House considered 3
clauses, but not the clause setting the charge and rates of income tax for the coming tax year.
A summary of the three parties’ tax policies was provided in, Taxes and benefits: the parties’ plans: Institute
for Fiscal Studies Election Briefing Note BN100, 27 April 2010
Conservative Party, Where we stand: Economy, 2010
HL Deb 31 January 2011 cc240-1WA
17

continue to look at the yields from different taxes, including the 50 per cent rate, to
ensure that they remain an efficient and effective way of raising revenue.
Top Statutory Income Employee social security contributions
Tax rate (as % of at top of income tax threshold
gross income) (as % of gross income) Combined
2000 2010 2000 2010 2000 2010
Canada 46.3% 45.6% 0% 0% 46.3% 45.6%
France 58.3% 47.8% 11% 11% 69.6% 59.0%
Germany 53.8% 47.5% 0% 0% 53.8% 47.5%
Italy 45.9% 43.8% 9.2% 10.5% 55.1% 54.3%
Japan 50% 50% 0.4% 0.4% 50.4% 50.4%
UK 40% 50% 0% 1% 40.0% 51.0%
USA 45.6% 41% 1.5% 1.5% 47.1% 42.5%
*Notes:
Canada
(1) Top Federal rate is 29%. Average of top provincial rates (including surcharges) is 16.6%
(2010). Highest combined rate applies in Quebec (54%).
(2) Social Security contribution ceiling is CAN$45,000 (approx £23,000)
France
(1) Top statutory rate of income tax is 40% (rising to 41% in 2011). Two Social contributions also
apply to gross income, CRDS and CSG and are included in the calculation above.
(2) Social Security contributions are deductible for personal income tax.
Germany
Social security contribution ceiling is €64,000. Combined with high contribution rates means that
individuals further down the income scale can face higher marginal rates than top earners. For
example an individual earning €41,000 (approx. £35,000) and facing full social security
contribution rates would face a marginal combined rate of 56%.
Italy
Top statutory rate of income tax is 43% in 2010. Regional up to a maximum rate of 1.4% also
applies.
Japan
Top statutory rate of state income tax is 40%. 10% flat rate local tax also applies.
USA
Since 2001 top federal income tax rate is 35% but this is due to expire in 2013 and return to
2000 level of 39.6%. Average of state top income tax rates = approx 6%.
6 The Coalition Government’s approach
On 20 May 2010 the new Conservative-Liberal Democrat Coalition Government published
their coalition agreement: this made no mention of the 50p rate, though it indicated that it
would make a number of tax changes in its first Budget:
The Government believes that the tax system needs to be reformed to make it more
competitive, simpler, greener and fairer. We need to take action to ensure that the tax
framework better reflects the values of this Government.
18

• We will increase the personal allowance for income tax to help lower and
middle income earners. We will announce in the first Budget a substantial
increase in the personal allowance from April 2011, with the benefits focused
on those with lower and middle incomes. This will be funded with the money
that would have been used to pay for the increase in employee National
Insurance thresholds proposed by the Conservative Party, as well as revenues
from increases in Capital Gains Tax rates for non-business assets as
described below. The increase in employer National Insurance thresholds
proposed by the Conservatives will go ahead in order to stop the planned jobs
tax.
• We will further increase the personal allowance to £10,000, making real terms
steps each year towards meeting this as a longer-term policy objective. We will
prioritise this over other tax cuts, including cuts to Inheritance Tax. 74
In his Budget statement on 22 June 2010, the Chancellor, George Osborne announced that
the personal allowance would rise by £1,000 to £7,475 from April 2011. The threshold at
which taxpayers become liable to the 40% higher rate will be cut at this time, to prevent
higher rate taxpayers benefitting from this change. Mr Osborne also confirmed an increase
in the threshold for employers paying National Insurance contributions on their employee’s
earnings from April 2011, as well as a rise in the rate of capital gains tax for higher rate
taxpayers. 75 However, the most significant tax change which the Chancellor announced, in
monetary terms, was a rise in the standard rate of VAT from 17.5% to 20% from 4 January
2011. It was estimated that the new standard rate will raise £12.1bn in 2011/12: by
comparison the £1,000 rise in the personal allowance will cost £3.49bn in 2011/12. 76 On the
additional 50% rate, the Budget report simply stated: “the 50p rate of income tax took effect
from April 2010 and will remain in place for the time being.” 77
Unsurprisingly comment on the new Government’s first Budget was dominated by the rise in
the standard rate of VAT, though in a review of its approach the OECD suggested the EU
should consider reducing the top rate of personal income tax: the top rate of Personal
Income Tax [PIT] “is substantially above the OECD average and likely to adversely affect
work incentives and entrepreneurship, particularly of high skilled workers. Consideration
should be given to reducing the top PIT rate to close to 40 per cent.” 78 In the weeks before
the 2011 Budget, there was more speculation that the Government might review the 50p
rate, given its concerns to ensure that the UK remains internationally competitive, and
updated predictions of the large share of income tax receipts paid by those with the very
highest incomes. 79 (HMRC now estimate that in 2010/11 taxpayers on the additional rate
were liable to pay £34.5bn, compared with total income tax liabilities of £152bn. 80 )
In an opinion piece critical of the 50p rate, Jo Johnson MP noted that three quarters of those
expected to pay it would be in sectors other than banking – “many of these will be precisely
the entrepreneurs the UK must attract to stimulate job creation and quicken its sluggish
recovery from recession”:
74
75
76
77
78
79
80
HM Government, The Coalition: our programme for government, 20 May 2010 p30
HC Deb 22 June 2010 c179
Budget 2010 HC 61 June 2010 p40
HC 61 June 2010 p32
OECD, United Kingdom - Policies for a Sustainable Recovery, July 2010 p25
“Top 1% of earners set to pay quarter of all income tax”, Financial Times, 12/13 February 2011
National Statistics: Income tax liabilities, by income source and tax band (Table 2.6), January 2013
19

Those who seemingly despise bankers, a distressingly large proportion of the
electorate, hail [the 50p rate] as a progressive tax on City "fat cats". It is rapidly
becoming clear, however, that it is a rather crude instrument for the collective
punishment of this banker class, somewhat like the EU fishing quotas that encourage
trawlers to catch and discard more fish than they ever take to shore … In a letter to the
parliamentary public accounts committee, [Sir Nicholas Macpherson, the permanent
secretary to the Treasury] revealed that the 50p rate is paid by three times more
innocent bystanders than bankers. 81 Out of 275,000 affected, only 63,000 - 23 per cent
- work in "financial intermediation". Many of these collateral victims, of course, will be
precisely the entrepreneurs the UK must attract to stimulate job creation and quicken
its sluggish recovery from recession.
The result is that, just as countries need to compete for highly skilled labour as never
before, the UK is seen as a high-tax economy … It is also not clear that the 50 per cent
rate will raise the revenue the then Labour government forecast in the March 2010
Budget. Back then, the estimated revenue was £1.3bn in 2010-11, £3.1bn in 2011-12
and £2.7bn in 2012-13. The first year of its operation therefore comes to an end this
month, which means that the Treasury will in due course begin to have a sense of
whether the 50p rate is actually making a meaningful contribution to the job of deficit
reduction …
But even if the Treasury receives the revenues forecast in last year's Budget, they will
be unlikely to compensate for the damage to the UK's international competitiveness.
This leaves the government facing a dilemma. On the one hand, there are huge
political difficulties in even signalling an intention eventually to cut taxes for the well-off
(in line with reductions in all other rates of taxation and only once the public sector pay
freeze is lifted) at a time of hardship for the poor and difficulties for many lower- and
middle-income families. On the other hand, in a global economy, no prudent
government will want to lumber itself with Harold Wilson-esque rates of personal
income tax for a second longer than necessary. 82
In his Budget speech on 23 March 2011, Mr Osborne confirmed that there would be no
change in the rates of income tax for the coming year, though he suggested that the case for
the 50p rate should be re-examined once there was comprehensive data on the amounts of
money it had actually raised for the Exchequer in its first year:
In an age when business and capital and people can increasingly move anywhere,
high tax rates can do real damage. That is true for high corporate tax rates, and it is
true for high personal tax rates too. They crush enterprise, undermine aspiration and
often undermine tax revenues as people avoid them. I am clear that the 50% tax rate
would do lasting damage to our economy if it were to become permanent. That is why I
regard it as a temporary measure, just as my Labour predecessor, the right hon.
Member for Edinburgh South West (Mr Darling), did when he introduced it. I have said
before that now would not be the right time to remove it when we are asking others in
our society on much lower incomes to make sacrifices, for we are all in this together,
but I think it is sensible to see how much revenue it actually raises. I have asked Her
Majesty's Revenue and Customs- [ Interruption. ] I have asked HMRC to find out the
truth when the self-assessment forms start coming in. 83
81
82
83
Public Accounts Committee, Banking support: written evidence from HM Treasury 16 March 2011 HC 973
2010/11
“Why a high-tax London is a disaster for Britain”, Financial Times, 17 March 2011
HC Deb 23 March 2011 c957
20

Provision to set the rates of income tax for the 2011/12 tax year was included in the Finance
Act 2011 (specifically section 1 of the Act). When this provision was debated at the
Committee stage of the Finance Bill, David Hanson MP, speaking for the Opposition, moved
an amendment to require the Government to publish “terms of reference, a timetable and
updates” on the department’s review of the 50p rate, akin to a formal consultation: “it is
inclement on [the Minister] to say to the House, ‘This is the time scale. This is who will
undertake it. This is when it will report. This is how you put evidence into it. This is when we
will make a decision for a future Budget on whether that 50p tax rate stays or goes’.” 84 In
response the Exchequer Secretary, David Gauke, explained why HMRC had been given this
task, but rejected the case for taking this approach:
HMRC is undertaking the review because it is important that all the information
available on the 50% rate is considered, and only HMRC can analyse individual selfassessment
returns, because they contain confidential taxpayer information … In
looking at the issue, HMRC’s main challenge will be to isolate the impact of the
additional rate from other factors. In light of that, it will conclude its analysis as soon as
it is practical to do so.
Its findings will then be used to inform the Government’s wider thinking on taxation
policy, with any announcements made by the Chancellor as part of the annual Budget
process in the usual manner. Of course, the Government keep all taxes under review
and reserve the right to announce changes at the appropriate time. Indeed, tax
changes are generally made at Budgets. Given that, there is no reason to accept the
amendment.
The Minister went on to explain that as self-assessment returns for the 2010/11 year would
be filed by the end of January 2012, HMRC will be reviewing this data “in early 2012.” 85 The
amendment was put to a vote, and negatived by 16 votes to 14.
The issue was debated a second time at the report stage of the Bill, when the Opposition put
down an amendment to require the Office for Budget Responsibility to produce a report on
the impact of the 50p rate. Moving the amendment David Hanson MP stated, “we want
further explanation of the methodology that they will use to consider the 50p tax rate for
future Budgets, and I think that the best organisation to do that is the Office for Budget
Responsibility.” 86 Opposing the amendment the Exchequer Secretary argued that HMRC
were best placed to review the data on the yield from the 50p rate, and criticised the way in
which the Labour Government had introduced it:
As I explained during the extensive debate on this clause in Committee … HMRC will
consider all the available evidence on the impact of the additional rate, including data
from the 2010-11 self-assessment returns, which will become available next year. Data
from tax returns are clearly essential in any assessment of the revenue raised, but of
course they contain confidential taxpayer information and are best reviewed by HMRC.
It already has the expertise in monitoring and evaluating tax measures and is
resourced to do so in future. The Office for Budget Responsibility has a different remit
in producing independent economic and fiscal forecasts, judging policy against the
fiscal mandate and analysing the sustainability of the public finances …
84
85
86
Public Bill Committee (Finance Bill) 10 May 2011 c10
op.cit. c22, c29. This point was also made in answer to PQs on this issue (eg, HC Deb 19 May 2011 c325W).
HC Deb 4 July 2011 c1324
21

As the additional rate was introduced by the previous Government, I can perfectly
understand why the right hon. Member for Delyn [Mr Hanson] is so interested in
establishing whether it was a successful policy, but when he talks about public scrutiny
of Budget measures I must ask him what public scrutiny was there when the 50p rate
was introduced? To what extent was the analysis published then, and to what extent
was it published when the 10p rate of income tax was doubled? What information was
put into the public domain at that point? As a Government, we have done much more
on putting information into the public domain by publishing our analysis.
Announcements in this area will be made by the Chancellor at the appropriate time. It
is peculiar, however, to hear the Opposition proposing more evidence-based policy
making only to reject the notion, it seems to me, that this Government should consider
the evidence before making any further commitments. 87
The amendment was put to the vote and negatived by 298 votes to 229.
Running up to the 2012 Budget there was a great deal of debate over the 50p rate, much of it
in response to a letter published in September 2011 in the Financial Times, signed by
DeAnne Julius, Chairman of Chatham House, and nineteen other leading economists:
Sir, We welcome the government putting the promotion of growth at the top of its
agenda given the fragile state of the UK economy . Other major economies have got
back to pre-recession output levels; the UK has not.
In this context, we are concerned that Britain's 50p income tax rate is doing lasting
damage to the UK economy. It gives the UK one of the highest personal tax regimes in
the industrialised world, making it less competitive internationally and making us less
attractive as a destination for both foreign investment and talented workers.
The UK has already slipped from second to fourth place as a destination for inward
investment. It punishes wealth creation by imposing on entrepreneurs and business
people a marginal tax rate in excess of 50 per cent once national insurance
contributions are added in. This is particularly damaging when the UK needs to create
new businesses in new industries and promote growth by small companies, which can
grow fast. It applies to just 1 per cent of taxpayers, who already pay 24 per cent of all
income taxes.
If a small portion of these highly mobile workers move elsewhere because of the 50p
rate then it is clearly a self-defeating way for the Treasury to try to raise money, and a
reduction in tax avoidance would be more effective. It is often portrayed as a justified
tax on the rich but the economic damage it causes means that it is against the interests
even of ordinary workers who don't pay it.
We call on the government to drop the 50p tax at the earliest opportunity as part of a
package of measures to stimulate growth. Only by returning to an internationally
competitive tax regime will Britain enjoy long-term sustainable economic growth. 88
Following this the paper published a series of letters from both supporters and critics of the
50p rate, 89 and the debate continued elsewhere, as commentators speculated as to what its
future might be. 90 As the IFS noted at the time, “rarely has there been such a wide debate
87
88
89
90
HC Deb 4 July 2011 cc1332-3
“Letters: Government must abolish 50p tax rate to grow UK economy”, Financial Times, 7 September 2011 –
see also, “Debate goes on in wake of 20 economists' letter to the FT : Q&A”, 8 September 2011.
“Letters : Costs and taxes mean the take is not worth the effort”, 9 September 2011; “Letters : UK tax debate
needs to consider capital gains”, 12 September 2011; “Letters : Top-rate income tax will not lead ntrepreneurs
to move abroad”, 13 September 2011
For example, “Tax ‘staying for now’…”, Times, 8 September 2011; “Should high earners pay less tax?”,
Sunday Times, 11 September 2011; “Head to head: Should the 50p rate go?”, Guardian, 8 September 2011;
“Diving into the rich pool”, Economist, 24 September 2011
22

about an issue of tax policy based on so little empirical evidence.” This observation was
made in the IFS’ 2012 Green Budget published in February 2012 in which it examined the
issue in some depth. 91 The analysis drew on much of the research that has already been
mentioned in this note, and it is not proposed to do it full justice here. That said, the authors
made some striking points about the limitations to any data the Chancellor would have, to
inform any decision about the 50p rate:
The first evidence on the revenue raised by the 50p tax rate will be contained in tax
returns for the 2010–11 tax year, which need to be submitted to HMRC by 31 January
2012 … This gives less than two months for [HMRC to review these figures] … even
assuming the data will be fully processed and available to researchers at the beginning
of February. But tax records for just one year after the introduction of the 50p rate are
unlikely to provide a robust estimate of how much revenue the 50p rate will raise, for
several reasons.
First, the 50p tax rate was announced over a year before its implementation … this
gave high-income individuals the incentive to bring forward income to 2009–10 to avoid
paying the increased tax rate. So tax revenues in the first year of the 50p tax’s
operation are likely to be particularly low and those in the prior year particularly high.
Second, one year after the tax’s implementation might be too soon for some individuals
to respond fully to the new tax rate. In particular, those who decided to leave the UK
following the announcement of the 50p rate might not have had enough time to
arrange this, such that the revenue implications might be higher going forward.
Third, because the Chancellor has said that he views the 50p rate as a temporary
measure, individuals are likely to behave differently from if the tax change were
believed to be permanent. On the one hand, individuals are more likely to engage in
responses that involve shifting income to a future date when an increase is temporary.
On the other hand, individuals are less likely to engage in responses that have a large
fixed cost, such as moving away from the UK. A separate issue is that the ongoing
economic crisis will likely make it difficult for HMRC staff to distinguish between the
impact of the 50p rate on tax revenues and the impact of other economic forces on the
incomes of the richest 1%. For example, many of the richest 1% are employed in the
financial services industry and are likely to have seen their incomes fall significantly
during the early part of the recent recession before rebounding strongly in 2010–11.
As they concluded, “Budget 2012 is almost certainly too soon to be making decisions on the
future of the 50p rate if they are to be informed by reliable, robust empirical evidence.”
Moving on from this, and echoing themes to the Mirrlees review, the authors argued that the
focus there has been on the money that the 50p rate may raise is “an an unduly narrow
approach to tax policy”:
Even if it raised money, it may not be the least socially harmful way of raising the same
amount of revenue, even from the same or similar people. Since most of the
behavioural response to high tax rates appears to take the form of tax avoidance, an
obvious way to increase revenue might be to reduce the opportunities that exist for tax
avoidance – for example, by aligning income and CGT rates, thereby negating any
advantage to taking remuneration as capital gains rather than income. But any reforms
such as this would need to be carefully thought through and implemented as part of a
wider strategy for tax policy. Effective tax policy requires a clear strategy, an
understanding of how the system as a whole works together, and a consistent and
91
“Chapter 9: the 50p income tax rate: what is known and what will be known?”, in, The IFS 2012 Green Budget,
February 2012 pp 180-196.
23

concerted approach to reform. Decisions about the abolition or retention of the 50p
rate, and about any measures to increase revenues from the richest individuals, should
be considered as part of a clear forward strategy. We can ill-afford poorly-thought-out,
short-term and un-joined-up tax policymaking. 92
7 The 2012 Budget : cutting the rate to 45p
The Chancellor George Osborne delivered his third Budget on 21 March 2012. In his speech
Mr Osborne referred to his earlier concerns over the 50p rate, and explained that the
department had found evidence that the 50p rate had caused “massive distortions”, in
particular with taxpayers, forewarned about the rate taking effect, shifting income into the
2009/10 year to avoid paying it. Moreover HMRC had revised its analysis of this behavioural
impact, and this suggested that cutting the rate to 45p would cost relatively little – an
assessment that the Office of Budget Responsibility found to be reasonable. This contrasted
with the amounts of money the Government expected to raise from taxpayers on the highest
incomes from a number of other Budget measures. As a consequence he proposed setting
the rate at 45p from April 2013.
An extract from the Budget speech is reproduced below:
[The 50p rate] is widely acknowledged by business organisations and international
observers as harming the British economy. Like the previous Chancellor who
introduced it, I have always said that it was temporary. But I also said, three years ago,
that I would not be prepared to reduce it while we were asking the whole public sector
to accept a pay freeze, and I will stick to those pledges.
A 50p tax rate, with all the damage it does to Britain’s competitiveness, can only be
justified if it raises significant sums of money. In last year’s Budget, I asked Her
Majesty’s Revenue and Customs to look at the evidence, and especially to look at the
self-assessment tax receipts that have come in since this January. I am publishing its
report today. What it reveals is that the 50p tax rate has caused massive distortions.
HMRC finds that an astonishing £16 billion of income was deliberately shifted into the
previous tax year, at a cost to the taxpayer of £1 billion—something that the previous
Government’s figures made no allowance for whatsoever. Self-assessment receipts
this year are below forecast by some £3.6 billion, while other tax receipts have held up.
The increase from 40p to 50p raised just a third of the £3 billion that we were told it
would raise.
Of course, the previous Government initially proposed a rate of 45p and then increased
that to 50p. Let me tell the House what HMRC says about the difference between 50p
and 45p. … The direct cost is only £100 million a year. Indeed, HMRC calculates that
the loss of other tax revenues may even cancel that out. In other words, it raises at
most a fraction of what we were told, and may raise nothing at all. So from April next
year, the top rate of tax will be 45p. … No Chancellor can justify a tax rate that
damages our economy and raises next to nothing—it is as simple as that...
These days the direct costing that the Treasury applies to every Budget measure is
independently assessed and certified by the OBR. Unlike the previous Government, it
92
The IFS 2012 Green Budget, February 2012 p195, p196
24

also assesses the cash flow consequences of forestalling. When it comes to the £100
million direct permanent costs of this measure, the OBR says this: “we believe that this
is a reasonable and central estimate”. It also assesses as reasonable the estimate that
the new taxes that I have introduced on the rich today directly raise five times that
amount. That is half a billion pounds that we can now use to help people on lower and
middle incomes keep more of their earnings. 93
The ‘new taxes’ to which the Chancellor referred were a new 7% rate of stamp duty on
properties worth £2m or more, provisions to prevent individuals avoiding the tax by buying
property through a company, and a cap on certain income tax reliefs. 94
The department’s assessment of the 50p rate are set out in a detailed report; 95 it would be
infeasible to précis this work here, though there are some points which are worth underlining.
First, the report anticipated about 300,000 people would be liable to pay the 50p rate –
around 1% of taxpayers. The share of total income tax revenues paid by this top one
percentile of taxpayers has been steadily growing over the past twenty years: from about
15% in 1990/91 to an estimated 27% in 2011/12. Almost half of these individuals work in
business services or financial intermediation. 96
Second, as discussed in the earlier sections of this note, the critical tool used to estimate the
amounts of money higher rates can raise is the ‘taxable income elasticity’ (TIE) - the
percentage change in total taxable incomes in response to a one per cent change in the netof-tax
rate (the proportion of each additional pound earned received by the individual after
tax, also known as the marginal retention rate). In the March 2010 Budget the Treasury had
used a TIE of 0.35 – suggesting that behavioural responses to the 50p rate would reduce its
yield by about two-thirds, reducing the extra liabilities of the affected individuals by about
£4.5 billion, to £2.4 billion in 2010/11. This estimate was on a liabilities basis, as opposed to
a National accounts basis: 97
• The “liabilities basis‟ shows the impact of the measure on tax liabilities in any
particular tax year, as opposed to a “cash basis‟ which shows the impact on tax
payments (there is often a lag between a tax liability arising and the date at which it
must be paid to HMRC).
• The National Accounts basis is a mixture of liabilities and cash, depending on the type
of tax. In particular, PAYE receipts are recorded on a liabilities basis, while Self
Assessment receipts, which are partly due in the year after the liability arises, are
scored on a cash basis. This basis is used in the published Budget measures table.
So, while the yield for the 50p rate was estimated to be £2.4bn for 2010/11 and 2011/12 on a
liabilities basis, the Budget report, using a National Accounts basis, gave estimates of £1.3bn
and £3.1bn respectively. 98
93
94
95
96
97
98
HC Deb 21 March 2012 cc805-6
The Budget report estimated that together these changes would raise £565m by 2015/16: HC 1853, March
2012 (Table 2.1 – items 4,5 & 6) p50.
HMRC, The Exchequer effect of the 50 per cent additional rate of income tax, March 2012
op.cit. pp 12-13. This was the projected tax base at the time of the March 2010 Budget. HMRC now estimate
that 236,000 people paid the 50p rate in 2010/11 (National Statistics : Table 2.1, January 2013).
op.cit. p16
Budget 2010 HC 451 March 2010 p140 (Table A11 – item l)
25

Work by researchers at the IFS prepared the Mirrlees Review had suggested a TIE of 0.46, 99
and academic studies using US data “have shown that TIEs tend to be higher for those with
higher incomes as they engage more in tax planning and are more mobile.” Moreover, the
data the department had received on payments made under self-assessment for 2010/11
suggested a much greater behavioural response than initially expected. Overall, incomes
among those with incomes above £150k increased 14% in 2009/10 but fell 25% in 2010/11.
This trend was strongest for dividend income – which grew 78% among this group in 2009/10
and then fell 73% in 2010/11. 100 To ascertain the impact of the 50p rate the department had
to make an estimate of the counterfactual to these figures – how incomes would have grown
if tax rates had been unchanged. Then, in looking at how receipts would be affected by
future tax changes, it was necessary to make allowance for the fact that forestalling – simply
moving income from one tax year to another – would have a short-run impact on receipts,
compared with other behaviours (such as emigration).
All told the department estimated that the 50p rate had raised about £1 billion at most:
behavioural responses had decreased the yield from the 50p rate by at least 83% - an
implied TIE of 0.48. As they concluded, “these results are more in line with those that would
be produced using the behavioural response estimates contained in academic literature. This
conclusion is also consistent with the £3.6 billion shortfall in Self Assessment tax revenues
observed in January and February 2012 (the months in which balancing payments relating to
2010-11 liabilities are received).” 101
The last step was to use this estimate of taxpayer responses to estimate how much the
Exchequer would lose from cutting the 50p rate. In general studies of TIEs have not taken a
consistent approach on whether taxpayers would react differently to rate reductions to rate
increases – though there are some reasons to doubt that their behaviour would be
symmetric: “Up-front investment in tax planning could lead to some “stickiness” when the
income tax rate is reduced – for example avoidance scheme would still be more tax efficient
and may have been setup to operate for a number of years. Taxpayers who shifted to
evasion behaviours may still under report their income. Where individuals have migrated it is
possible that they may not moved back to the UK.” 102
The department elected to use a slightly lower TIE of 0.45 – and based on this, estimated
that setting the additional rate at 45p from 2013/14 would only lower total yields by about
£100m a year. 103 At this time many commentators noted this was a critical assumption –
including the BBC’s economics editor Stephanie Flanders:
There is clearly room to wonder whether the behavioural change will be symmetrical. If
you have spent a lot of money setting up a company, for example, to avoid the 50p
rate, it's not obvious you will break that up now the rate is 45p. On the other hand, it's
plausible that some other money will come back into the system. It really is too soon to
say. What is certain is that millions of basic and higher rate taxpayers people will pay
less tax next year as a result of this budget. And that the UK is less than half way
through an unprecedented seven-year programme of tax rises and spending cuts that -
99
This work is discussed in section 1 of this note.
100 HMRC, March 2012 p20, pp28-9
101 op.cit. p45
102 op.cit. p23
103 op.cit. p51
26

the chancellor suggested on Wednesday - could involve a further £10bn in welfare cuts
from 2014-15. 104
In a piece before the Budget, in the light of considerable speculation that the Chancellor
would cut the 50p rate, 105 Ms Flanders noted that any claim that the rich would be paying
more, say from cracking down on tax avoidance would be “rather tricky to prove … it’s not
that forecasts are dishonest. It’s just that, to put it bluntly, the money all looks the same
when it comes in. The wealthy entrepreneur doesn’t usually attach a note saying that he
usually manages not to pay much tax but this year he’d been forced to cough up.” 106
In their commentary on this assessment the Office for Budget Responsibility agreed that the
TIE of 0.45 was a “reasonable and central estimate”, but went on to underline the
considerable uncertainties to these forecasts:
Taken at face value the HMRC study might suggest an even higher TIE, but this would
risk placing put too much weight on a single year’s outturn evidence – especially given
the complications from disentangling the forestalling effect. There is also reason to
believe that the behavioural response to the cut in the tax rate may be smaller than to
the increase, because of the costs involved in swiftly reversing expensive decisions on
retirement, migration, tax planning and evasion. But it is very important to emphasise
the significant uncertainties around all such estimates. 107
Robert Chote, head of the OBR, was asked about the department’s assessment when he
gave evidence to the Treasury Committee after the Budget; he suggested that this was a
particularly difficult exercise because it was necessary to disentangle the impact of
forestalling from other behavioural responses. Mr Chote was also pressed by Teresa Pearce
MP as to why HMRC had thought future forestalling would be equivalent to £6.5bn, a much
lower figure than the £16bn estimates of forestalling that was thought to have happened
before the 50p rate took effect: anticipated
Q85 Teresa Pearce: … Looking at some of the figures, it is estimated that £16 billion
of income was shifted then, but what is obviously going to happen is that people are
going to shift again, but the other way. Yet you have estimated only £6.25 billion for
that, which seems quite low to me …
Robert Chote: One issue is obviously that the differential in the tax rates is half of
what it previously was.
Q86 Teresa Pearce: Half of quite a lot is still quite a lot.
Robert Chote: It is quite a lot. The other point is that in the case of avoiding the 50p
rate, there were several years in the future that you could shift the income out of into
the year prior to the rate change happening. In this case, you have only this year to
shift it out of into the future year in order to take advantage of the lower rate, so there is
a smaller pool of time period to shift your income out of.
Q87 Teresa Pearce: Even so, in your estimate, it looks as though in 2012–13 there
will be a £3 billion drop in revenue, because of people shifting the income.
Robert Chote: That is right. Roughly, if you have £6 billion, that is the impact.
104 “Budget 2012: A big debate about small numbers (cont'd)”, BBC News online, 21 March 2012
105 “Top tax rate to fall to 45p after bitter budget talks finally end”, Sunday Times, 18 March 2012
106 “Budget 2012: A big debate about small numbers”, BBC News online, 20 March 2012
107 Cm 8303, March 2012 p109
27

Q88 Teresa Pearce: That is a big number, and the assumption is that it will come in
the later year.
Robert Chote: As I say, you are looking there specifically at the forestalling effect—the
simple time shifting. There is then the separate issue of what has been the underlying
behavioural response that you might expect to persist as a result of labour supply
responses or of permanent changes to tax planning behaviour and so on. It is a heroic
exercise to try to disentangle those two components and to quantify them. 108
In his commentary on the Budget the director of the IFS, Paul Johnson, contrasted the
uncertainties to this estimate with the fact that, without any change, cutting the additional rate
to 45p would cost £3bn a year:
HMRC’s analysis suggests that the 50p rate only raised around £1 billion in 2010-11, a
lot less than the £2.6 billion previously forecast by the Treasury and – prior to
yesterday –assumed in the OBR’s forecasts. As the HMRC put it, “it is difficult to
construct a plausible outcome consistent with a yield estimate as high as those original
forecasts”. And some of the data they base this on are certainly dramatic. They find an
astonishing 25% drop between 2009-10 and 2010-11 in the recorded incomes of those
with incomes over £150,000.
That said, they also acknowledge the very considerable uncertainty around their
estimates. The estimates depend on a range of assumptions about what might have
happened in the absence of the 50p rate, and especially on how much of the drop in
recorded income is down to one-off “forestalling” – that is people taking income a year
early before the 50p rate was introduced. The truth is we still do not know the true
effect of the 50p rate on revenues.
The worry for the Chancellor is that the estimate that cutting the top rate to 45% will
only cost £100 million is particularly uncertain. It assumes a “no behaviour change”
cost of £3 billion offset by a behavioural change of £2.9 billion. The first number we
know reasonably accurately; the second number is estimated with great uncertainty.
Even if we knew the effect of introducing the 50p rate – which we don’t with any
precision – responses may not be symmetric. Those who have got a taste for avoiding
the 50p rate may continue to avoid the 45p rate (even if they wouldn’t have done so
had the 50p rate never existed) …
Perhaps one worry for the Chancellor as the dust settles on his third Budget is that in
his attempt to achieve a fiscally neutral package he has created some risks. We know
pretty much for sure that the increase in the personal allowance will cost about £3.5
billion in 2014-15. We do not know with anything like such certainty that the cut in the
50p rate will cost only £100 million. We do not know that the proposed caps on tax
reliefs will bring in the £300 million or so the Chancellor is banking on. Nor do we know
that the stamp duty changes will raise the nearly £300 million that he has pencilled in.
This Budget may turn out to be less fiscally neutral than intended. 109
Mr Johnson also raised these concerns when he gave evidence to the Treasury Committee,
while making the point that the department’s findings chimed with other studies of taxpayer
behaviour in similar circumstances:
108 Thirtieth report: Budget 2012, 18 April 2012 HC1910-II 2012-12 Ev11
109 Budget 2012- Opening remarks: Tax changes do not amount to a reform programme, Institute for Fiscal
Studies, 22 March 2012. At this presentation, James Browne provided a detailed discussion of HMRC’s
analysis : The 50p income tax rate, IFS 22 March 2012
28

A number of things are striking about the HMRC report, the most striking of which is
the scale of change in incomes of the people on over £150,000. It is extraordinary that
we see a fall in their recorded income of 25% in the years just before and after the
introduction of it. The problem the HMRC had was that a lot of that was forestalling:
how do you think about the counter-factual? What it has done, broadly speaking, as
much as it could given the information, is try to compare what happened to the
incomes of people between £115,00 and £150,000, with what happened to the
incomes of those earning over £150,000 ...
The real issue is: does it look from what it has done that its central estimate is broadly
sensible? Probably, yes, but as you can back out from what it has said, it is incredibly
uncertain, to the extent that we think that its estimate suggests there is only a twothirds
probability that a revenue-maximising rate lies between 30% and 75%. Those
numbers are absurd in some sense, but that gives you a sense of the level of numbers
of assumption and uncertainty that underlie what it has done.
If that were the only thing we knew, we would be pretty sceptical that its results bore a
lot and sceptical about how much weight you put on the results. The thing that makes
us think that you may want to put more weight on them is that they are actually pretty
much in line with what previous studies here and elsewhere have got. 110
For its part the Committee concluded that, “the cost and benefits of reducing the additional
tax rate to 45p are both highly uncertain, and could be significantly more or less than the cost
included in the Budget. We recommend that HMRC publish in due course a comprehensive
assessment of the effect on the Exchequer of the new 45p rate.” 111
Initial reactions in the press were divided about the Chancellor’s decision. An editorial in the
Times argued that the change was “good for business … the new rate raises no money and
deters people from bringing business here. It cannot be defended. Mr Osborne has made a
political gamble, but it is the right bet for Britain.” 112 By contrast the Guardian characterised it
was “an unnecessary tax cut … four months ago [at the time of the Autumn Statement],
cutting taxes for the super-rich was not what the Chancellor saw as a priority; not it’s among
his top priorities. This raises one simple question: why?” 113 In an editorial before the Budget
the Financial Times had argued that while “calls for its abolition from business people and
Tory back bencher grow ever more insistent … the Chancellor would be wise to leave it be –
at least for now”:
There would be a stronger case for cutting the 50p rate if it could be shown that it was
a significant break on the growth of the economy’s supply side. But with growth
arguably suffering from a lack of demand rather than supply, it is hard to make this
argument. And anyway, if one could make it, one would certainly not respond with a
half measure like a 5p cut. 114
After the Budget the paper acknowledged that “the economic case for the higher rate is weak
… but the move risks undermining the coalition’s claim that the burden of austerity is being
110 HC1910-II 2012-12 Ev24 Q171
111 HC1910 2012-12 para 97
112 “Leader: A 50p bet on Britain”, Times, 22 March 2012
113 “Editorial: George Osborne’s misplaced priorities”, Guardian, 22 March 2012
114 “Editorial: Osborne’s choice and the 50p rate”, Financial Times, 17 March 2012
29

share fairly.” 115 The Economist argued that the politics of the Chancellor’s decision would be
“rough, but it was the right thing to do. Because Britain specialises in high-value services
such as banking, accountancy and insurance, it needs to attract the worlds brightest … this
week’s change may be more symbolic than fiscal … but symbols matter.” 116 In a second
article on the department’s assessment of the 50p rate, the paper suggested that the future
of the 45p was unlikely to be a long one:
The results suggest that the tax take from incomes over £150,000 is little different
whether you set the tax rate at 45% or 50%. Setting the rate much higher than 45% is
pointless; beyond 50% it is self-defeating. The additional revenue loss of abolishing
the higher rate altogether is estimated at a few hundred million. That is unlikely to
have escaped the Chancellor’s notice. 117
Writing in the journal Taxation, the magazine’s editor, Mike Truman, pointed out that the rate
schedule retained the other major change to the income tax regime made by Alistair Darling
in 2010: the withdrawal of the personal allowance for those on incomes over £100,000:
The prize for most leaked announcement probably goes to the reduction in the 50%
rate to 45%. From the pre-Budget press coverage, some might have thought that this
was going to happen from 6 April 2012. It is in fact going to come in from April 2013,
just like the other changes. Indeed, where this government deserves great credit is that
it has stuck to its promise that it will have a proper process of consultation on
significant tax changes, leading to draft legislation issued four months before the
Budget.
So the top rate of tax from April 2013 will be 45%, right? Wrong. There will still be an
effective 60% charge on income between £100,000 and £118,200, as the personal
allowance is withdrawn at a rate of £1 for every £2 of income. Exactly the same taper
is seen as a candidate for simplification when applied to age allowance, so why not
simplify it at the top of the income scale too? Rather than withdrawing personal
allowances (or the nil-rate band of income tax as it should properly be described), start
the 45% rate at a point which raises about the same amount in total; say about
£85,000. 118
Many Member raised this issue in the debates following the Budget statement; in his speech
the Shadow Chancellor, Ed Balls, argued that the cut in the 45p rate would cost much more
than the Government had estimated:
The Chancellor tries to claim that the top rate of tax does not raise any money, and
that he is raising in stamp duty and tax avoidance five times the cost of cutting the top
rate of tax. But his own HMRC report makes the true position clear, in table A2 on
page 51. It says that next year he will give £3.01 billion in tax cuts to existing and
legitimate top rate taxpayers, paid more than £150,000. That is a fact. That is six times
more in tax cuts to the richest than he is raising in the stamp duty and tax avoidance
measures. He is gambling that this will then bring in £2.9 billion in new tax revenues
from people currently not paying tax, without any hard evidence to justify that claim—
115 “Editorial: An audacious gamble from the artful Osborne”, Financial Times, 22 March 2012
116 “Leader: This way, sir”, Economist, 24 March 2012
117 “Falling flat : The 50% tax rate”, Economist, 24 March 2012
118 “Complexification”, Taxation, 22 March 2012
30

an estimate that the OBR says in the Budget documentation is “highly uncertain” and
could lead to a much higher cost. 119
In response the Secretary of State, Vince Cable, argued that the Labour Government’s
original decision to introduce the 50p rate had been shown to be fundamentally flawed:
I agree with the Chancellor that the decision to cut the top rate of tax from 50p to 45p
was economically the rational thing to do. I want to focus the debate not on symbols
but on substance. I share the emotional reaction of the many people who are disgusted
to hear pampered financiers whinging about their taxes. On an emotional level, nobody
can sympathise with that. However, we have to deal with the practical realities that
were burned on my consciousness as a result of sitting in my place on the Opposition
Benches for 13 years, exchanging views on the top rate of tax with successive Labour
Ministers from Blair to Brown to Balls. Year after year, they would tell the Liberal
Democrats that it was economically stupid to raise the top rate of tax above 40%. That
was their message, year after year. Then, a few weeks before the end of their
Government—I think it was 57 days—they introduced the 50p rate in order to create a
political dividing line. That decision had nothing whatever to do with economics. The
point that they had been making over all those years was that raising the top rate in
that way would raise relatively little revenue.
Despite the casuistry of the shadow Chancellor’s intervention a few moments ago, in
trying to argue that vast sums of money had been sacrificed, line 3 of the scorecard
makes it absolutely clear that we are talking about a revenue loss of £100 million a
year. That figure has been endorsed by the Office for Budget Responsibility. The
changes that have been introduced in the Budget, including increased taxation of highvalue
property, plugging loopholes and much tougher anti-avoidance rules, will bring in
at least five times that amount. 120
At a later stage in the debates Alistair Darling, who had introduced the 50p rate when
Chancellor, argued that the inherent uncertainties in the forecasting exercise, given the size
of forestalling effects, made the Government’s case for change quite weak:
I want to say a word about the 50p rate of tax, since I introduced it. At the time, I said it
was a temporary measure. I did not particularly want to introduce it, but I took the view
that, at a time when we were asking many people in this country to share the burden of
meeting the increased cost of the downturn, it was right that those who had done well
over the previous 10 years or so should bear their fair share of it. I do not have a
philosophic attachment to that rate at all, therefore, but this is not a Budget in which I
would have returned to the topic, simply because the incomes of many other people in
this country are currently being squeezed and they are going to lose out this year. I
would have tried to have done something about their position first.
The documentation that the Treasury has produced on the measure reminds me of the
stuff that was produced for the five tests in respect of the euro, in that so much
evidence has been adduced in support of the Government position. Why did they not
just say that they philosophically did not want the 50p rate so they were going to cut it?
As the OBR says that its calculations are highly uncertain and it is very difficult to
estimate behavioural effects, especially after only a year, and given that there are so
119 HC Deb 22 March 2012 c960. Mr Balls is referring to the ‘static’ cost of the cut in the additional rate, that
makes no allowance for any behavioural change.
120 HC Deb 22 March 2012 c966
31

many uncertainties and there will be so much forestalling, it is difficult for the
Government to say, “Look, this wasn’t actually raising anything.”
At a time like this, I think the fact that the rate brought in £1 billion and that we are
talking about smaller sums in relation to some of the welfare reforms means that the
Government cannot simply write it off. If they want to bring the rate down to 45p, that is
fine, although I am bound to say that I have never understood the argument that
someone will still work harder if the rate comes down to 45%, yet they will also work
harder if they are told at the same time that they will be paying five times as much tax
in the future. That seems a very odd argument to run. 121
In HMRC’s assessment of the 50p rate, it was noted that further years’ data could add
something to this exercise, but a definitive answer was infeasible, given the difficulties of
stripping out other influences on incomes and tax yields:
The results can only be considered an estimate of the yield in the very short term and
as such may be higher than the long term yield, particularly as some behavioural
responses such as the possibility that those affected might leave the UK may take
place over a number of years. Similarly, the fact that the additional rate may have been
viewed as temporary may mean that behavioural responses such as migration are
smaller than if it had been a permanent change. Conversely, a temporary increase
may make it more likely that individuals postpone withdrawing income from
investments in anticipation of the rate going down, thereby increasing the size of the
behavioural response.
Although the analysis is only based on one year‟s data, this does not invalidate the
results. Future years‟ data may improve the reliability of estimates, although estimating
what incomes and tax revenues would have been in the absence of the additional rate
also becomes more difficult as time elapses further from the „base ‟ year (the year
before the additional rate became effective). 122
As noted above, in his Budget speech the Chancellor announced a number of measures to
increase tax receipts from the wealthiest taxpayers, including a cap on certain unlimited
income tax reliefs. This has proved quite controversial as many charities have argued a cap
could have a very serious impact on the incentives for those on higher incomes to make
charitable donations. In an interview with the Telegraph, Mr Osborne said he had been
shown some analysis of tax returns illustrating the problem that a cap could tackle:
The Chancellor personally studied the “anonymised” copies of the tax returns
submitted by some of the country’s wealthiest citizens which showed some people are
able to avoid paying income tax entirely. The analysis convinced Mr Osborne that
millionaires must pay a minimum rate of tax equivalent to about a third of their
earnings, which has been described as a “tycoon tax”.
Mr Osborne told The Daily Telegraph: “I was shocked to see that some of the very
wealthiest people in the country have organised their tax affairs, and to be fair it’s
within the tax laws, so that they were regularly paying virtually no income tax. And I
don’t think that’s right. … I’m not allowed to be shown the names of the individuals but
I’ve sat with the most senior people at the Inland Revenue, the people who run some
of the high net worth units there. They have given me examples, anonymised
examples, and so we are taking action.”
121 HC Deb 26 March 2012 cc1199-1200
122 HMRC, March 2012 p20, pp2-3
32

The report found that Britain’s 20 biggest tax avoiders have used three main loopholes
to legally reduce their their income tax bills by a total of £145 million in a year. Two
thirds of them wrote off business losses in one of their companies against their income
tax bill, reducing it by as much as half . Several of them offset the cost of business
mortgages or borrowing on buy-to-let properties against their income tax bill, while
others took advantage of relief on donations to charity. 123
During the second reading debate on the Finance Bill on 16 April the Chief Secretary to the
Treasury, Danny Alexander, cited some figures showing that a small, but significant number
of the very highest earners had exploited these rules so as to pay very little tax in practice:
The basic principle that the wealthiest in the land should pay a fair proportion of their
income in income tax must be absolutely right, not least because last week we
published data showing that last year some of the wealthiest people in the country had
reduced their tax bills to below the basic rate of income tax …
The figures [are] based on the tax system from 2010-11, under the tax rules put in
place by [the previous] … Government. They show, for example, that 6% of those
earning over £10 million a year were paying tax at under 10%, that 3% were paying it
at 10% to 20%, that 8% were paying it at 20% to 30%, that 12% were paying it at 30%
to 40%, and that 72% were paying it at above 40%. 124
The figures were widely reported in the press, though not officially published at the time; 125
subsequently the Exchequer Secretary, David Gauke, set out these estimates in answer to a
number of PQs – from which the following is taken:
Mr Gauke: The information requested is as follows:
(i) The proportion of taxpayers liable to income tax by their total income and average
income tax rate are shown in the following table:
Proportion (%) of individuals reporting various average tax rates by total income category (2010-11)
Income
Average tax £100,000 to £150,000 to £250,000 to £500,000 to £1,000,000 to £5,000,000 to Over
rates £150,000 £250,000 £500,000 £1,000,000 £5,000,000 £10,000,000 £10,000,000
Above 40% 0 6 73 81 80 81 72
30% to 40% 67 77 18 11 10 8 12
20% to 30% 24 13 5 4 5 4 8
10% to 20% 8 3 2 2 2 3 3
Under 10% 1 2 2 2 3 4 6
Figures are based on an analysis of self-assessment (SA) returns for the 2010-11 tax
year, as available at Budget 2012. Income bands include those with average rates at
the lower limit (e.g. a tax rate of exactly 30% falls in the “30% to

When the figures were first reported, Robert Peston, the BBC’s business editor suggested
this put the Government’s case for cutting the additional rate in a new light:
Today's data shows that more than 73% of those earning over £250,000 were paying
an average tax rate above 40% in 2010/11. And even among those earning between
£5m and £10m and those earning over £10m, the proportion paying more than 40% in
tax was 81% and 72% respectively.
All of which implies that many tens of thousands of people were (and are) paying the
50% tax rate, and were unable to dodge it. To state the bloomin' obvious, all of those
people were given a very lovely tax cut in the budget - which will doubtless add fuel to
Labour's campaign that the budget rewarded the rich at the expense of the rest. Now it
is possible, I suppose, that vast numbers of people artificially reduced their income
below the threshold of £150,000 (by deferring dividends for example) to avoid the 50%
rate. That is certainly the implication of HMRC's study of what was happening.
But even so it is striking quite how many people paid tax greater than 40% - a
proportion 10 times greater than those who succeeded in paying almost no tax. Or to
put it another way, perhaps the highest earners have had a slightly unfair press,
because the majority of them seem to have been paying their proper share.it is striking
quite how many people paid tax greater than 40% - a proportion 10 times greater than
those who succeeded in paying almost no tax. Or to put it another way, perhaps the
highest earners have had a slightly unfair press, because the majority of them seem to
have been paying their proper share.” 127
The Government are still planning to introduce a cap from April 2013, though this is not to
apply to relief on charitable donations. 128
Turning back to the second reading debate in April 2012, Owen Smith MP, speaking for the
Opposition, argued that these estimates suggested that it was misleading to think that the
50p rate had been ineffective in raising additional revenues for the Exchequer:
Only this morning, we heard the Exchequer Secretary trying to justify the proposed
changes on charitable giving and the 25% cap on tax relief. He did so by revealing that
a handful of people in this country who earn more than £1 million and more than £10
million succeed in dodging paying their tax. There is no news in that. One would have
thought that a competent Government who understood what they were doing would
have realised that the flipside of that argument was to reveal that more than 75% of
higher rate taxpayers—those paying 40% and 50%—do pay all of their taxes….
Page 52 of the review by Her Majesty’s Revenue and Customs of the 50p rate, in table
A2 … states in black and white that £3 billion a year will be forgone as a result of the
changes, not the £100 million figure that is arrived at with smoke and mirrors about the
taxable income elasticity calculation that Treasury Ministers signed off. What does the
Office for Budget Responsibility say about that? … It says that there is huge
uncertainty about that calculation. We contend that we should rely on the absolute
numbers, as revealed this morning—that £1 billion was raised from the 50p rate last
year, not the nonsense £100 million figure. 129
127 “More than 70% of high earners paid 50% tax rate”, BBC News online, 16 April 2012
128 For details see, Income tax – cap on unlimited reliefs, Library standard note SN6303, 28 March 2013.
129 HC Deb 16 April 2012 cc127-8
34

In response the Exchequer Secretary David Gauke argued that the 50p rate had proved a
particularly poor way of raising money from the wealthiest taxpayers:
What is the effect of the 50p rate? We have the assessment of HMRC. What has the
50p rate achieved? More people work overseas; total income has fallen by between
£2.9 billion and £4.4 billion; and GDP is between 0.2% and 0.3% lower. … Both
HMRC and the OBR have made a central estimate, and that is what we have used. I
am sorry it does not fit into Labour’s ideology, but the reality is that HMRC’s
assessment is that the 50p rate raised less than half the expected amount and might
even have cost the Exchequer. The OBR’s assessment is that it is a reasonable and
central estimate.
It takes a special kind of incompetence to produce a policy that sends a terrible signal
to our competitors, drives higher earners out of the country, damages GDP and fails to
raise revenue. There are better ways of raising revenue from the wealthy—for
instance, by addressing SDLT avoidance, raising the SDLT rate on properties worth
more than £2 million and capping reliefs to ensure that the wealthy cannot opt out of
income tax. Both sides of the House want to raise more money from wealthy people.
The reality is that we are better at doing it. 130
There has been less discussion of the 50p rate recently, 131 though in their Green Budget
published in February 2013 the IFS noted that, although “much uncertainty” remained over
its impact on revenues, “several things are clear”:
First, even on the Treasury’s original assumptions, raising the top rate of tax to 50p
would have had major behavioural effects. Second, HMRC’s analysis quite clearly
demonstrates significant amounts of behavioural change by affected individuals, and
especially the shifting of incomes between years (‘forestalling’). Such large distortions
to behaviour are indicative of an economically inefficient tax and remind us that it is
important not to fixate simply on how much the 50p rate raised (or cost) and how much
the move back to 45p will cost (or raise). There are likely to be better ways of raising
money from a similar group of high-income individuals that entail less avoidance or
distortion to economic activity than a 50p income tax rate 132
In contrast there has been a great deal of discussion about income tax for those on lower
incomes, first in connection with the Government’s approach to substantially increasing the
personal allowance in each of its first three Budgets, 133 and second, with a recent speech by
the Labour leader, Ed Miliband, in which he stated that a Labour Government would
reintroduce a 10p starting rate of income tax, funded by an annual levy on residential
property – a ‘mansions tax’. 134 These differing approaches were the subject of an Opposition
Day debate on 12 March, when Members also touched on the anticipated cut in the
additional rate. Opening the debate for the Opposition, Chris Leslie contrasted the
Government’s approach to reforming tax credits and social security benefits with the impact
of the 45% rate for those on the very highest incomes:
130 HC Deb 16 April 2012 c131. Similar arguments were made when provision in the Bill to set the rates of
income tax from 2013 were debated two days later by the Committee of the Whole House (HC Deb 18 April
2012 cc327-8). The clause was approved by 323 votes to 256.
131 HMRC’s assessment of the 50p rate has been cited in answer to some PQs on this issue: for example, HC
Deb 10 January 2013 cc427-8W & 22 January 2013 cc 144-5W.
132 “Chapter 7: Tax and welfare reforms planned for 2013/14”, IFS Green Budget 2013, February 2013 p193.
Chapter 9 of the report discusses various options for increasing tax receipts from the rich.
133 As noted, for more details see, Library standard note SN6569, 25 March 2013.
134 The proposal for a ‘mansions tax’ is discussed in, Land value taxation, Library standard note SN6558, 28 June
2013 pp15-20.
35

Let us consider the contrast that now exists as a result of Government decisions.
Those who are on low and middle incomes—that is, the vast majority of the British
public—have seen their tax credits cut, their child benefits squeezed, their cost of living
rise as a result of higher VAT and their wages fall in real terms. However, the richest
1%, including the lucky few who earn £1 million a year, will see an average tax cut of
£100,000 in four weeks’ time, and banking executives will not have to pay that
annoying bonus tax, all thanks to the Chancellor’s generosity. 135
As part of his response to the debate, the Exchequer Secretary, David Gauke, reiterated the
Government’s case for cutting the 50p rate:
Let me say something that I hope is not controversial: the principal purpose of income
tax is to raise revenue. So we commissioned HMRC to analyse just how effective the
50p rate was in raising revenue.
That HMRC report, laid before the House, set out thorough and compelling evidence
on the impact of the 50p rate. It showed that the rate was uncompetitive, distortive and
inefficient. Not only did it not raise much revenue, but it could even have cost the
Exchequer money when the indirect impacts on other taxes were taken into account.
This Government were not prepared to maintain a rate of income tax that was both
ineffective at raising money and that left us with the highest statutory rate of income tax
in the G20, so we acted, in the interests of the country, and the top rate of tax will fall to
45p from April this year. This will see our top rate of tax drop below that of Australia,
Germany, Japan and Canada, which will send a signal to businesses taking decisions
on investment and location that the UK is a competitive environment. 136
The 2013 Budget did not see any change in the Government’s plans to cut the additional rate
to 45% from April 2013, though a written answer after the Budget gives updated estimates of
the amounts raised by the 50% rate, and its projected yield had it been sustained: 137
Asked by Baroness Miller of Hendon: To ask Her Majesty's Government what was
the (1) forecast, and (2) actual, tax yield at the 50% rate band for fiscal year 2011-12,
and what is the forecast tax yield at the 50% rate band for 2012-13.
Lord Deighton: Estimates of tax liabilities at the additional rate of income tax are
published in Table 2.6 "Income tax liabilities, by income source and tax band, from
2010-11 to 2012-13" on HM Revenue and Customs' (HMRC) website 1 , set out at the
end of this answer.
Statistics are based on the 2010-11 Survey of Personal Incomes (SPI) projected in-line
with the Office for Budget Responsibility's (OBR) Autumn 2012 Economic and fiscal
outlook for future years. Statistics based on 2011-12 outturn data and the OBR's March
2013 projections are not yet available.
It is not possible to infer the additional yield from the imposition of the 50% rate from
these statistics. However, HMRC's report "The Exchequer effect of the 50% additional
135 HC Deb 12 March 2013 c162. The Labour Party have claimed that 13,000 individuals with incomes over £1m
will receive an annual tax cut worth £100,000 from a 45% rate. This is based on HMRC’s projected figures for
total incomes and tax liabilities, by income range, for 2012/13 (National Statistics: Table 2.5), and is examined
in a recent post by FullFact (“Are 13,000 millionaires getting a £100,000 tax cut?”, 27 February 2013).
136 op.cit. c181
137 HL Deb 27 March 2013 cc252-3WA. See also, HL Deb 24 June 2013 cc500-2.
36

ate of income tax" provides an estimate of this. This showed that the rate raised far
less revenue than originally expected. The report is available on HMRC's website 2 .
Current and previous estimates of additional revenue from the 50% income tax rate
can be found in the Office for Budget Responsibility's March 2012 Economic and Fiscal
Outlook report, "Box 4.2: The additional rate of income tax" 3 .
This has been recreated in the following table:
£ billion
Outturn Forecast
Liabilities Basis 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Underlying Impact 0.0 2.5 2.5 2.7 2.9 3.2 3.5
of 50p rate: Original Estimate,
OBR estimate June 2010 (TIE=0.35)
Current Costing1 0.0 0.7 0.6 0.6 0.7 0.7 0.8
Difference 0.0 -1.8 -1.9 -2.1 -2.2 -2.5 -2.7
1
Based on the current estimated cost of a reduction in the rate from 50 per to 40%.
Key:
- negligible
. not applicable
Footnotes for table 2.6
37

(1) Taxpayers with no taxable earnings and total taxable income from savings below the starting rate limit.
(2) Taxpayers with no taxable earnings and total taxable income from savings between the starting rate limit and the
basic rate limit and/or dividends at the 10p ordinary rate.
(3) Taxpayers with total taxable income below the basic rate limit.
(4) For 2009-10 taxpayers with total taxable income above the basic rate limit. From 2010-11onwards taxpayers with
total taxable income between the basic rate limit and the higher rate limit.
(5) Taxpayers with total taxable income above the higher rate limit.
(6) In this context tax reductions refer to allowances given at a fixed rate, for example the Married Couples Allowance.
(7) Projected estimates based upon the 2010-11 Survey of Personal Incomes using economic assumptions consistent
with the OBR's December 2012 economic and fiscal outlook. These projections fall outside the scope of National
Statistics.
1 http://www.hmrc.gov.uk/statistics/tax-statistics/table2-6.pdf
2 http://www.hmrc.gov.uk/budget2012/excheq-income-tax-2042.pdf
3 http://budgetresponsibility.independent.gov.uk/wordpress/docs/March-2012-EFO1.pdf
The Chancellor did not discuss the additional rate in his 2013 Budget speech, though the
Budget report noted that the very wealthiest individuals will continue to pay a large share of
all income tax receipts:
Over a quarter of all income tax is paid by just 1 per cent of taxpayers, with the top 5
per cent paying around half of all income tax … Since 2010, the Government has
raised taxes on the rich in every Budget: Budget 2010 increased higher rate capital
gains tax; Budget 2011 tackled avoidance through disguised remuneration; Budget
2012 raised stamp duty on high-value homes; Autumn Statement 2012 took action to
reduce the cost of pensions tax relief; and Budget 2013 announces further measures
that tackle offshore tax evasion by high earners. The revenue raised from these
measures will offset many times over the small cost of just over £100 million from the
reduction in the additional rate of income tax from 50 per cent to 45 per cent. 138
Income tax is an annual tax, so that the annual Finance Bill has to make provision for the tax
to be levied each year. Clause 1 of the Finance Bill 2013 imposes the tax for 2013/14, and
the clause was one of those selected for debate on the floor of the House, at the start of the
Bill’s Committee stage. On this occasion the Opposition put down an amendment to require
the Government to review the impact of the new 45p additional rate; Catherine McKinnell, the
Shadow Exchequer Secretary, set out the party’s position as follows:
What we got in this year’s Budget, and in the very first clause of the Finance Bill, is the
coalition’s unjustifiable and grossly unfair decision to reduce the top rate of income tax
from 50p to 45p, a cut that benefits just 267,000 people earning more than £150,000,
13,000 of whom are lucky enough to earn more than £1 million. Indeed, those lucky
few are receiving an average tax cut of a whopping £107,000 according to HMRC
figures …
We have made it perfectly clear from day one that we do not support the cut to the 50p
rate now, and we call on the Government to analyse the impact of the introduction and
premature removal of the 50p rate. When we come to publish our next manifesto, we
will review the state of the economy and whether a 50p rate would be the right
response. I hope that Members of other Opposition parties, as well as Liberal
Democrats, will support our amendment, because it would help to establish whether
the 50p rate would bring in the additional Exchequer revenue that was anticipated—but
if the Government refuse to back it today, we will never know. 139
138 HC 1033, March 2013 para 1.202-3. For more data on the distribution of income tax receipts see, HMRC,
National Statistics: Shares of total income … and income tax (Table 2.4), April 2013.
139 HC Deb 18 April 2013 c508, c512
38

In response the Exchequer Secretary, David Gauke, argued, “the fact is that a 50p rate was
no effective”:
HMRC published a thorough and very well-researched report at Budget 2012 that
showed the effect of the additional rate of income tax. Those matters were debated at
considerable length last year and the report shows that the rate was not raising the
money that the previous Government intended it to raise. It is illogical to maintain a tax
rate that is not effective at raising revenue from high earners and that risks damaging
growth. We have found better ways of raising money from the wealthy that raise more
money but do less damage to the economy.
We always keep tax rates under review ... It seems to me that the purpose of the
amendment is not just to enable us to have another debate on the 50p rate today but
to enable the Labour party to find an escape route from its policy. Until a few days ago,
it was against getting rid of the 50p rate. Labour will not answer the question, however,
of what it will do at the next election. Its holding position is clearly that it will have a
review. 140
140 op.cit. cc535-6. In the event the amendment was negatived by 264 votes to 203 (c537).
39

Appendix: Discussion of the 50p rate in the Mirrlees Review
In September 2011 the Institute for Fiscal Studies FS published a major review of the UK tax
system, which had been chaired by Sir James Mirrlees. 141
A central theme to the review was that politicians and policy-makers needed to consider the
system as a whole. Certainly whatever the merits of the debate there has been over the 50p
rate, supporters and critics have tended to discuss it in isolation. While the Mirrlees Review
did not make any particular recommendations about the 50p rate itself, in their examination
of the taxation of earnings, the authors discussed the work that had been done on the money
the 50p might raise, before making some wider points about taxing the wealthiest in society.
An extract is reproduced below: 142 *
From 2010–11 a new 50% rate of income tax applies to incomes above £150,000. The
government estimates that this directly affects only 275,000 individuals, out of an adult
population of about 49 million. Yet the income tax rate applying to the very highest earners
has an importance out of proportion to their numbers, simply because they are such an
important source of revenue: even before this reform took effect, almost a quarter of income
tax was paid by the top 1% of income tax payers, just over 300,000. 143 That is a fact worth
repeating. Almost one pound in every four collected by the income tax system comes from
just 1% of income tax payers. Of course this largely reflects just how much more pre-tax
income the top 1% of taxpayers earn than the bulk of the population do.
As noted in the previous chapter, the responsiveness of taxable income, and hence tax
receipts, to tax rates may be quite high at the top of the earnings distribution—not because
high earners’ employment decisions or hours of work are particularly responsive, but
because they may find other ways to minimise the amount of tax they pay: by reducing their
effort per hour worked or by, for example, changing the form of their remuneration,
contributing more to a pension or to charity, converting income into capital gains, setting
themselves up as a company, investing in tax avoidance, illegally hiding their income, or
even leaving the country altogether (or not coming when they otherwise would have). In fact,
it is not clear whether the 50% rate will raise any revenue at all.
There are numerous ways in which people might reduce their taxable incomes in response to
higher tax rates; at some point, increasing tax rates starts to cost money instead of raising it.
The question is where is that point? Brewer, Saez and Shephard (2010) 144 address precisely
this question for the highest-income 1%. Their central estimate is that the taxable income
elasticity for this group is 0.46, which implies a revenue-maximising tax rate on earned
141 The review is available online here: http://www.ifs.org.uk/mirrleesReview
142 “Chapter 4: Reforming the Taxation of Earnings in the UK” in, Tax By Design: the Mirrlees Review, September
2011 pp 108-110
143 Sources: For the number facing the 50% income tax rate—HMRC statistics, table 2.1; for the top 1%’s share of income tax
revenue—HMRC statistics, table 2.4,; for total population—ONS 2008-based national population projections,; for the
number of dependent children in the population—HMRC, Child Benefit Statistics: Geographical Analysis, August 2010.
144 Brewer, M., Saez, E., and Shephard, A. (2010), ‘Means-Testing and Tax Rates on Earnings’, in J. Mirrlees, et
al., Dimensions of Tax Design: The Mirrlees Review, Oxford: OUP Institute for Fiscal Studies.
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income of 56%. 145 This in turn (accounting for NICs and indirect taxes) corresponds to an
income tax rate of 40%: the introduction of the 50% rate would actually reduce revenue. 146
However, there is no escaping the uncertainty around the estimate of a 40% revenuemaximising
income tax rate. It was based primarily on what happened to incomes when tax
rates changed in the late 1980s; but people’s ability to respond to tax changes may well have
changed since then. Increases in international mobility and in the availability of complicated
financial products may have increased people’s scope to respond, while a succession of antiavoidance
measures may have reduced it. Changes to capital gains tax have at different
times made it easier and harder to escape tax by converting income into capital gains. And
the government increased the likely yield of the 50% income tax rate by also announcing a
limit on the tax relief that high earners can obtain by saving their income in a pension. So the
elasticity might have risen or fallen. And even if nothing had changed since the late 1980s,
statistically there was only a two-thirds chance that the revenue-maximising rate was
somewhere between 33% and 57%. 147
So we do not know with confidence what the revenue-maximising top tax rate is. But
governments do not have the luxury of stopping there: policy must be decided, so in the
absence of compelling evidence they must take a best guess. The Treasury’s best guess is
that the 50% rate will raise some revenue. That is certainly not impossible, but it certainly
uncertain.
Whatever the precise revenue-maximising tax rate, it seems unlikely that much additional
revenue can be raised simply by increasing the income tax rate for this group. But this is not
the only tool available for extracting money from this group. Widening the income tax base—
removing reliefs and clamping down on avoidance—not only raises money directly but also
reduces the scope for shifting income into tax-free forms and thereby makes tax rate
increases more effective revenue-raisers. And there are, of course, other taxes aimed at the
wealthy (notably inheritance tax), which might have the potential to raise revenue.
In addition, we should not forget that the revenue-maximizing rate is itself not necessarily the
rate that we should impose on this group. If we value their welfare at all, or have concerns
over long-term behavioural effects, then we might want a rate below the revenue-maximizing
rate in any case.
145 Brewer, M., and Browne, J. (2009), Can More Revenue Be Raised by Increasing Income Tax Rates for the
Very Rich?, IFS (Institute for Fiscal Studies) Briefing Note 84 (http://www.ifs.org.uk/publications/4486).
146 Increases in rates of NICs and VAT announced since this analysis was done will further reduce the income tax
rate that corresponds to a given overall tax rate on earnings.
147 Brewer, M., and Browne, J. (2009). The estimate of the revenue-maximising top tax rate also relies on two
other debatable assumptions. The first is that, were it not for tax changes, the incomes of the top 1% would
have evolved in the same way as those of the next richest 4%, which we cannot know. The second is that any
reduction in taxable income would be matched one-for-one by a reduction in spending (and therefore indirect
tax revenues)—likely to be broadly accurate if the reduced taxable income reflected a real reduction in
economic activity in the UK (less work effort or less net immigration, for example), but not if it reflected more
tax avoidance or evasion, say.
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