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50p Tax Rate Too Much

In a letter to the Daily Telegraph, 537 entrepreneurs and business owners have warned that the additional rate of income tax of 50% is “damaging the economy” and called for it to be scrapped in this month's Budget.  

The bosses of small and medium sized enterprises across the UK claim that the charge has prevented them from expanding their businesses and their workforces and accuse George Osborne of putting “populist politics before sound economics.” This may cause some consternation amongst government ministers as the signatories to the letter represent the “bedrock” of British industry upon whose future success is vital to the economic recovery.

The business leaders who each employ up to 1,400 people say, “The tax, which is in effect a 58p tax after national insurance is taken into account, puts wealth creators like us in a very awkward position…..penalising high earners through an unfair, politically motivated tax puts populist politics before sound economics.”

By taxing their personal income excessively, they argue that they have less incentive to inject personal investment into their businesses or build on their success.

The letter goes on to say that the top 1% of earners already pay nearly 28% of total tax revenues.

Messrs Cameron and Osborne have always maintained their opposition to the 50p rate and that it should only be a temporary measure. Ministers, however, are understood to have privately ruled out abolishing the additional rate until at least 2015 for fear that they would be accused of handing out tax cuts to the rich. Up until very recently the Liberal Democrats too were opposed to removing the top rate of income tax but, according to the Sunday Times, Nick Clegg has told the Chancellor that he is prepared to relent in return for a new tax on expensive homes. One idea for a property tax is to band homes according to value and imposing a fixed rate for each band, with those owning properties valued at tens of millions of pounds paying the greater tax.

The Treasury is currently awaiting the results of a study from HMRC of the impact of the additional rate tax of 50% during its first year ending 5th April 2011. This is expected to reveal that it raised far less than the £3 billion it was forecast to yield.

The Office for National Statistics recently released its public finance figures for January which showed that although overall receipts have increased by 6.2%, mainly because of large corporate tax payments, Self Assessment receipts have declined. One theory is that the decrease is because business owners took evasive action and made a conscious decision to pay themselves dividends in advance of the implementation of the 50% rate.

The public sector finance finances for January show the following:

Tax % Increase
VAT 17.5
Capital Gains Tax 26
NIC 3
Corporation Tax 15

Whilst Capital Gains Tax and VAT are effective the same cannot be said for the 50p rate and the captains of industry may well have a point.

By Andy Vessey

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