Return Of UK’s 50 Percent Rate ‘Would Encourage Avoidance’
The London School of Economics’s Centre for Economic Performance (CEP) has said that proposals to reintroduce a 50 percent top rate of income tax would likely result in a negligible fall in the working hours of higher earners but will lead to an increased tax avoidance risk. It says tougher enforcement will be required to ensure payment of tax at the higher rate.
The findings are included in a new report from the CEP, released ahead of the May 2015 UK general election.
In 2010, Labour raised the top rate of income tax (the “additional rate”) from 40 percent to 50 percent for those with taxable income over GBP150,000. The personal allowance was phased out for those with income above GBP100,000, leading to a marginal tax rate of 60 percent for the affected workers.
The coalition Government reduced the additional rate to 45 percent in 2013 but retained the phase-out of the personal allowance. The Labour manifesto proposes to restore the 50 percent rate for those with taxable income over GBP150,000 while the Green Party proposes raising it to 60 percent. The UKIP manifesto mentions the ambition to lower the rate to 40 percent. The Liberal Democrat and Conservative manifestos do not mention the top rate of tax, though it was widely reported that the Conservatives wanted a rate of 40 percent when the rate was reduced in 2013.
According to the CEP paper, in 2012-13, only 0.9 percent of taxpayers (273,000 people) had taxable income above GBP150,000. They received 11 percent of total taxable income and paid 25 percent of income tax. It warns that as rates increase, reported taxable income tends to decline. It says that revenue could fall under plans for a higher rate on account of a drop in compliance.
Professor Alan Manning, the report’s author, said that if the next government hopes to raise the top tax rate, it must be complemented by a redoubled effort to tackle tax avoidance. He said: “If politicians want to raise the top rate of tax, they need a more aggressive approach to dealing with tax avoidance and tax evasion.”
