Lagerberg: 50% rate fails to deliver

The 50p tax rate is not having the effect that was desired, according to Grant Thornton’s Francesca Lagerberg, despite the government ending up with its highest monthly surplus in four years.

The ONS released its public finance figures for January showing that although overall receipts are up 6.2%, in part due to large corporate tax payments this month, Self Assessment (SA) receipts are down.

Lagerberg, head of tax at Grant Thornton, said this could be because people under SA knew the 50p rate was coming in so took action in advance of 6 April.

Continued...

» Register now

The full article is available to registered AccountingWEB members only. To read the rest of this article you’ll need to login or register.

Registration is FREE and allows you to view all content, ask questions, comment and much more.

Comments

50%    6 thanks

neiltonks | | Permalink

Many of those 'in the know' agree that the 50% rate isn't actually generating significant income. Ministers would like to abolish it but politically this would be a problem. Even though it yields little, the majority of the population would perceive abolition as the Tories looking after their high-earning supporters at a time when everyone else is seeing their incomes and living standards squeezed. Appearing to be making the richest even richer at a time of austerity isn't really an option in a democracy, where politicians often have to do what's seen as right rather than what actually is right!

nogammonsinanundoubledgame's picture

I would also be interested to know ...

nogammonsinanun... | | Permalink

... whether the 60% tax rate is bringing in anywhere close to the RIA expectation.  We have spent a considerable amount of time in the last year keeping our clients' incomes below £100K who otherwise would have been content (I would not go so far as to say happy) to pay 40% on a higher sum.

With kind regards

Clint Westwood

@neiltonks...those 'in the know'....    2 thanks

justsotax | | Permalink

are these the same that saw the banking crisis coming and failed to warn everyone?....

Based on that argument we might as well suggest getting rid of IHT given it produces such a little amount of revenue....will save those lucky few having to engage an accountant to avoid/reduce their exposure to it.

bookmarklee's picture

Jan 31st 2012 is the FIRST date to reveal any info re 50%

bookmarklee | | Permalink

The media may think it's been around a while. As Fran notes though we've only now got any data.

Although announced long ago the 50% rate was only introduced in April 2010. So the first tax year in which it applied was 2010/11.And the first balancing payments to reflect the increase in rate from 40% to 50% were due 31 January 2012.

The PAYE reciepts for 2010/11 include PAYE charged at 50% of course and this may have contributed to the 2.3% increase referenced above. I haven't checked but how much money does this 2.3 % represent? I wonder if it's a significant sum disguised by refs to a tiny % increase in a huge sum?

Mark

and just to add to bookmarklee comments....    2 thanks

justsotax | | Permalink

no chance this is due to the economic conditions?  Or perhaps now that the bankers are receiving bonus payments in shares rather than cash that has impacted these figures.......

 

I would expect a little more from someone like lagerberg - but perhaps she truly believes that to get the rich to work harder you need to pay them more, and to get the poor to work harder you pay them less. 

dbowleracca's picture

If you earn over £150k you can afford a good tax accountant    3 thanks

dbowleracca | | Permalink

I think it's all down to those individuals who earn £150k or more taking action to avoid paying tax at 50 % by whatever means necessary.

This could be simply not drawing money from their business, making pension contributions or quite possibly utilising the tax avoidance arrangements that are available to high earners.

Personally I think that trying to get someone to pay 50p in the pound in tax is disgusting - just because someone is successful why should they be punished?

It could also be linked to the state of the economy, partners in accountancy practices or law firms or other professional practices may have seen their profits decline and so too would many sole traders and directors of small to medium companies.

I suggest the government look at what happened in hong kong when they reduced tax burdens - the economy grew exponentially!

Good old days?

Tromdo | | Permalink

When with tax & IIS you paid 98%!

andrewdiver's picture

It hasn't collected, but then    1 thanks

andrewdiver | | Permalink

It hasn't collected, but then it has always been muted as a temporary measure.  This in itself reduces collection as people could accelerate income or subsequently defer it for a period.  But not indefinitely.   

Remove all doubt, embed it into the UK system at least for the term of this government. See how much it collects in year 2, 3 and 4.  You cannot make a judgement on a single years figures and expect to make any practical conclusions from it.  
 

It is a political tool as much as a revenue generation exercise anyway.  It isn't whether it collects 50% tax, but rather that people are aware that those who are most able to contribute when times are tough are.  So you don't abolish it because it isn't practically doing so.  

Precisely what merit would abolition achieve? 

frustratedwithhmrc's picture

We're stuck with the 50% rate for this parliament anyway    2 thanks

frustratedwithhmrc | | Permalink

andrewdiver wrote:

Remove all doubt, embed it into the UK system at least for the term of this government. See how much it collects in year 2, 3 and 4.  You cannot make a judgement on a single years figures and expect to make any practical conclusions from it.  

This was always just a "tiger trap" for the Tories set by Labour anyway.

Given the prevailing public mood and the structure of the Coalition there is no way this idiotic measure can be removed before the next general election in 2015.

I suspect George Osborne will go into the election promising only the £10,000 tax free, however if he wins an overall majority, I expect them to dump the Liberal Democrats and in the budget after the election announce the abolition of the 50% band and get it over with.

We have argued here that the 50% band was unlikely to collect additional tax, but rather to reduce overall taxation as people take avoiding action.

People that were happy (well as happy as you can be) to pay themselves the majority of their companies earnings as dividends are now defering payment until the rate is repealed.

Since we can't get rid of it for now, let's collect the necessary information from income tax receipts for the remaining years of this parliament and then examine these to see if it does prove that people are taking a behavioural approach to avoid these high rates and if the evidence strongly suggests they are then abolish the 50% rate.

I am not in favour of giving concessions to the rich, but taking 50%+ of anybodys earnings, even if they can afford it, is wrong. This is WHY people take avoiding action.

It would also be useful to see if companies (especially SME's and micro businesses) are hoarding cash. This would also tell us something as I strongly suspect they are.

Involuntary tax    1 thanks

coalface | | Permalink

Anecdotal experience does suggest that whilst many were "happy" to pay 40% tax, the advent of the "additional rate" at 50% prompted many to start transferring income / assets to lower rate spouses. It's what you'd expect.

 

Those in a position to pay 50% are also in a position to do something about it!

It's not really 50%, though    1 thanks

AndyC555 | | Permalink

It's not really 50%, though is it.  With NIC its 52%. If the state is taking more from each marginal £ than it's letting you keep, where's the incentive to work?  To declare?  By the time you get to £1m a year, you are already handing over more of your TOTAL income than you are keeping. Ok, that's a huge sum for most of us but for anyone that is earning that or above, they may well feel that keeping less than half of what they earn isn't acceptable to them.

It is also the case that    1 thanks

fiona@felaccoun... | | Permalink

It is also the case that manya self employed people such as doctors and dentists who would do extra work such as out of hours that used to mean they paid 41% tax are turning down some of the work so that they do not hit the 50% threshold.  The fact that those earning between £150k and £180k are in effect paying tax at 62% on the excess rather than 41% as they used to means they don't want to work for only 38%.  The 62% is the fact that they lose the tax free allowance at £1 lost for every £2 extra income and then they also pay Class 4 NIC at 2% rather than 1%. Again the number of limited companies that are set up to take the extra income and pay corporation tax immediately but allowing planning of when to take pay and dividends is a direct result of the 50% tax rate. People can "cope" with paying 40% tax but resent paying well over half their income to the government if they don't have to. If you have millions in income then the 50% rate doesn't have such an effect on the marginal rate!

The top rate of tax

johnfrancis | | Permalink

The real scandal is the 60% effective income tax rate applied to taxable income between £100,000 and £114,950, as the personal allowance tapers away to nothing.  With either Class 1 or Class 4 NIC, that's an effective rate of 62%.  So a lot of avoidance action is directed to keeping people below £100,000, as noted in an earlier comment on this page.

If this particular tiger trap were filled in, people would be happier to pay 40% (or 42%) up to the £150,000 mark, and you might even see less desperation at that level.  I think it's the "double whammy" that has really got taxpayers and their accountants going.

But you never hear any reference to 60%, and that is because journalists don't understand it.  So it probably suits Mr Osborne to keep very quiet about it.

Meanwhile, the 62% tax band stretches to £116,210 for the coming tax year.

50% TAX, no thanks!    1 thanks

Dutchnick | | Permalink

We are not now locating our new operation in the UK  as, the 50% tax rate plus the other UK costs are making it unattractive. The decision was made by the directors who would have been the ones affected, the 40 or so new employees who will not now be employed would have paid more tax and contributions to the UK economy than their contribution of 50%. The current anti-business attitude has also taken its toll. I am particularly sad as I look forward to moving back to the UK. 

How long can people hold back their earnings?    2 thanks

brian.barrett | | Permalink

Without discussing the political merits of 50% tax rate.  I do wonder whether, as Francesa has intimated, higher earners may have taken earnings/dividends before the increase, and may currently be holding back on earnings in the hope the rate may decrease soon.

If this is the case then they can only do this for so long.  It may be, therefore, too early to conclude that the 50% rate is not working.

Nichola Ross Martin's picture

Good point Brian    1 thanks

Nichola Ross Martin | | Permalink

That was exactly what I was wondering. Reversing the rate would be unpopular in this bash the bankers culture, so if the 50% rate was maintained, wouldn't people just adjust and get used to it?

The Chancellor could fiddle with NICs perhaps instead.

 

If 50% is temporary, the figures will mislead

dwgw | | Permalink

The politics isn't worth debating on here as no-one's likely to change their mind.

What is patently obvious is that the 50% rate has been emasculated by the clear intention of the Tories to repeal it if they win power in 2015.  Sit on your hands for 3 years and see what happens - you don't need any fancy advice to achieve that.

The revenue raising success or otherwise of the 50% rate must be viewed in that context.  I suspect the picture would change if there were no plans for 50% to be repealed.

Top rate of tax

simonwwhitt | | Permalink

Of course the top rate is not 62%, it is 67% since in order to pay an employee £100 a company has to pay an additional 13.8% NI - so net receipt is £38 out of £113.80.  This is the figure that needs to be used in talking about the burden of taxation and the lengths to which people will go to avoid it.

In this climate, money should be allowed to talkmore than voters    1 thanks

sclack | | Permalink

I don't think it's a major surprise that 50% tax rate is earning anything for the government - I think a lot of people out there are saying "I told you so!".  If you're earning that much, you'll get an accountant to help you "lose" some, to get below the limit.

As someone else pointed out, Singapore and Hong Kong have very low taxation and their economies aren't suffering at all.  It's all very well saying the rich should pay more than the poor but, at 40%, they already were and there is no virtue in flogging them further.  In the USA, where taxes tend to be lower overall, there is a culture of expectation among the super-rich that they should support community projects in some way and we would do much better to promote that than just take the money away from them.  Would Bill Gates have done as much if the US government had just taxed him blind?  Would they have had as much effect?  I doubt it.

As a base principle of human nature, taxes should never be so punitive as to make you work more for the state than for yourself.   This was a purely political move to attract those who are hard of thinking.

Contractors are avoiding the higher rates of tax

davechaplin | | Permalink

johnfrancis wrote:

The real scandal is the 60% effective income tax rate applied to taxable income between £100,000 and £114,950, as the personal allowance tapers away to nothing.  With either Class 1 or Class 4 NIC, that's an effective rate of 62%.  So a lot of avoidance action is directed to keeping people below £100,000, as noted in an earlier comment on this page.

This is spot on. Earning £100K to £115K range is quite common for highly skilled contractors, and many of them we have spoken to at ContractorCalculator are not taking income (via dividends) over £100K, and instead sitting on profits until this unreasonable tax is removed. Others are channelling profits into pensions via salary sacrifice, reducing the corporation tax paid. Some are happy to live on £100K a year (who isn't?!) and just let the rest build up in the company from which they will draw during retirement, staying under the HRT threshold.

When taxes rise above 50% people educate themselves more about tax, which can often result in them paying much less in the long term.

 

 

 

jon_griffey's picture

Tax Johnny foreigner    2 thanks

jon_griffey | | Permalink

I know people who didn't mind paying 40% tax.  However at 50%/62% they are bending over backwards and to avoid it and looking at contrived schemes.  The problem is that whilst they are at it they won't avoid just the 50%, but a large chunk of 40% as well.  So the Govt loses out.

It would be difficult for the Govt to abolish the 50% rate as they will be slated for giving tax cuts to 'the rich'.  On expedient way to deal with this politically would be for the Chancellor to 'replace' the 50% tax with CGT on UK situs capital gains for non residents, i.e. UK property.  As foreigners don't have a vote there seems to be no downside. 

Rich ≠ Successful

chatman | | Permalink

dbowleracca wrote:
just because someone is successful why should they be punished?

They are not being taxed for being successful; they are being taxed for being rich. Some people might see taxation merely as punishment; others see it as contributing to the society which supports you.

frustratedwithhmrc's picture

Let us remember the words of Lord Clyde (Law Lord)

frustratedwithhmrc | | Permalink

chatman wrote:

Some people might see taxation merely as punishment; others see it as contributing to the society which supports you.

Law Lord, Lord Clyde:

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the Taxing Statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.”

Taxes are not contributions, but forced extractions under threat of legal force.

That they are essential to the running of government makes some level of forced extraction justifiable, but we should call a spade a spade.

There is a point where it is too much, the only disagreement is how much is too much.

.

ireallyshouldkn... | | Permalink

I have only one client paying the 50% rate last year by choice,  the 15-20 odd who could do have deferred.  Some are looking at CGT on winding up, others are just holding tight, others in their 50's paying big pension contributions.  The fact of the matter is most people on that sort of money dont NEED to take it out, they can wait and play games.

The other game we play is of course around the £100k mark. I have several clients chose to work less (consultants etc) to stick under it.  A recent computation resulted in a client working 4 days a week and not 5 as the 5th day was largely pointless. This is a genuine loss of activity in the economy. 

So is there less tax coming from my client base in 2010/11? Definitely. Less on the long term? Hard to say, but there is now a much bigger incentive to push money into pensions and retain in the company than pay out and pay up.

 

David S Ward's picture

50%    1 thanks

David S Ward | | Permalink

 

I agree with most of the comments made.

When either the actual or effective rate of tax goes over 50%, people are going to go to great lengths to avoid paying it. This does not help our economy or our tax system. However there is a real issue with the growing inequality of income and wealth in open economies like the UK. I guess most of us instinctively support the capitalist/free market system, but it will only survive and prosper if it is seen to benefit the great mass of the population and not just the super - rich. The way out of this impasse may be to reduce the highest income tax to 40 or 45% and pay for it by introducing or increasing taxes on wealth and luxury goods. The Lib - Dem idea of a mansion tax (which would have to be paid by companies, non-doms just like anyone else) and a VAT rate of say 25% on luxury items could be combined with the Chancellor's desire to reduce the 50% rate.  Just reducing the income tax rate without doing something else would be political suicide for the coalition, and in my view would be unfair on the large numbers of people who have been hit in recent years by redundancies, pay cuts etc.

other extreme    1 thanks

frauke | | Permalink

I know a couple of people (not clients) who used to take salaries of about £80k plus dividends.  They weren't happy to pay the tax, but did anyway.   When the 50% tax came along, they decided not to bother any more. I don't think they even bother to take their personal allowance.

They paid off their mortgages and have no debt.  Just need "spending money " to live, which they pay their accountants to arrange....    (won't go into that here). 

Most people begrudge others for having money which is really sad.  A clever Scottish bloke went to Hong Kong and reduced the tax rate to a 15% flat rate after allowances and they have been raking the money in ever since. 

Even the tightest person would be happy to hand over £15% of their gross income after personal allowances, but that would mean unemployment for most Accountants working in tax.   But like the Poll tax, it would not be considered fair if "rich people" only had to pay this amount.  By rich of course, we mean anyone who earns more or has more than us.

Oh by the way I don't pay the 50% or the 40% for that matter....

Cynical, but...    2 thanks

RogerMT | | Permalink

..."50% tax rate not working, so scrap it" say 50% tax payers...hmmmm...;)

I am shocked to hear that people actually like paying tax...    1 thanks

justsotax | | Permalink

I was sat with a client (br taxpayer) discussing some expenses....he didn't want any hassle with hmrc so wanted to play things very straight (not that was i was suggesting was illegal).....that was until he saw his potential tax bill....sound familiar....

 

On that basis I would suggest that there is an awful lot of basic rate tax payers who don't particularly like paying 29% tax/nic....shall we suggest reducing that for them.....?  A

 

RogerMT maybe cynical but is correct.... it is a little like remuneration committees made up of bankers voting on other bankers bonuses.....'now shall we say no bonus this year as the bank has made a loss....hmmm....no lets vote £1million....it will encourage and motivate them...and he is on my businesses remuneration committee next week'.....