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Income tax: the additional 50p rate

Published Wednesday, November 25, 2015

In the 2009 Budget the Labour Government announced the introduction of a new 'additional' 50p rate on incomes above £150,000 from April 2010. This paper discusses the background to the 50p rate, the debate over its political significance and its economic impact, before looking at the Coalition Government’s decision to cut the additional rate to 45p, and recent speculation as to its future.

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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 major 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 estimated: £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 HMRC to review “how much revenue it actually raises.”[4]  

In his Budget on 21 March 2012 Mr Osborne announced that HMRC 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]   HMRC’s assessment of the impact of the 50p rate was set 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 the new rate.[6]  Although the Chancellor’s announcement was quite controversial, the Government implemented this rate change as proposed.

The additional rate remains set at 45p. In its first Budget in July 2015 the Conservative Government announced a ‘tax lock’, to set a ceiling to the current main rates of income tax, National Insurance contributions (NICs) and VAT. Provision to this effect with regard to the basic, higher and additional rates of income tax was made by s1 of the Finance (No2) Act 2015. In the Spending Review & Autumn Statement, the Government confirmed that the three rates of income tax would remain 20%, 40% and 45% for 2016/17.[7]

Notes:

[1]     HC Deb 22 April 2009 c244; Budget 2010 HC 451 March 2010 p140 (Table A11 : item l); HMRC, Statistics: Number of individual income taxpayers (Table 2.1), May 2015

[2]     HM Government, The Coalition: our programme for government, 20 May 2010 p30. See also, Income tax : increases in the personal allowance (2010-15), Commons Briefing Paper 6569, 17 June 2015.

[3]     HC Deb 22 June 2010 c179; Budget 2010 HC 61 June 2010 p32 (para 1.97)

[4]     HC Deb 23 March 2011 c957.  See also, HC Deb 14 September 2011 c1191W

[5]     HC Deb 21 March 2012 cc805-6. The Coalition Government confirmed that the additional rate would be 45% for 2013/14 in the 2013 Budget (HC 1033, March 2013 para 1.202-3).

[6]     HMRC, The Exchequer effect of the 50 per cent additional rate of income tax, March 2012 pp48-53.  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)

[7]     HM Treasury, Tax and tax credit rates and thresholds for 2016-17, 25 November 2015

Commons Briefing papers SN00249

Author: Antony Seely

Topics: Economic policy, Taxation

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