The Budget and higher earners

We have spent much of the last week working through the implications of the Budget and in particular the impact on higher earners. This comes in the form of both higher rates of tax of up to 50 per cent and a loss of tax relief on pension contributions. The mathematics of bands and the degrading of the personal allowance with rising income means that in some instances taxpayers could be paying a marginal rate of tax of as much as 62.5 per cent.

As we’ve dug deeper and deeper into the small print of the Budget and its associated documents we have come to realise the truly punitive nature of this Budget for higher earners. There is no doubt that this is entirely politically motivated. The degree to which the Government has gone to win back its core voters is spiteful and shows deep envy of anyone who has had the courage and determination and taken the risks to build a career and earnings from a business that almost certainly provides significant amount of tax revenue to HMRC already, as well as supporting employment in local communities. For instance, buried deep in the new rules concerning the top rate of income tax is the fact that the £150,000 band will not increase annually with inflation. Other tax bands and allowances generally increase at or around the rate of inflation, but failing to apply this to the £150,000 band means that over the years more and more people will fall into the band.

The impact of the tax measures is serious. We have calculated that a client earning £500,000 per annum and making £100,000 annual pension contribution would see their net income after tax and pension contributions drop by £80,000 in 2010.

The anger of the business community in general and higher rate tax payers in particular will be further increased by the news today that HMRC expects to get only 31% of the total possible income from tax increases announced in the Budget. Even worse, far from receiving around £3.4bn from the 50p income tax rate as the Chancellor estimated in the Budget, the Treasury now seems to think that it will loose £2.3bn because of what it calls the behavioural effects of the tax rate. In essence, many will find legal means to avoid paying tax by taking themselves out of the tax net completely so the Treasury will loose not only the revenue from the 50 per cent band, but all the other tax revenues from that individual or household.

It seems that these measures are so draconian that many people are now looking beyond simple tax tweaking and planning to life style changes such as taking early retirement, working fewer hours or moving abroad. None of this is going to help the economy or do anything to contribute further to HMRC’s coffers.