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

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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
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