Ed Balls announcement that he would raise the additional rate of tax from 45% to 50% were he to be Chancellor after the May 2015 election received much publicity, even if it was hardly an unexpected move. The increase is about politics – it polls well – rather than revenue-raising:
- According to HMRC estimates, in 2013/14 there are just 287,000 additional rate tax payers – that is less than 1% of all tax payers.
- HMRC further estimates the total income tax paid by these individuals after deductions of allowances given as tax reductions will be £49.3bn, of which £33.2bn is additional rate. Over 80% of the additional rate tax was deducted from earnings.
- It is not possible to say that if 45% tax raises £33.2bn, then 50% tax will raise proportionately more (about £3.7bn). As 2013/14 is the first year of 45% additional rate tax, it is likely that the year is benefitting from deferral of income that occurred in 2012/13, especially as the Chancellor revealed the move to 45% more than a year in advance. The reverse happened in 2010/11, when 50% tax started nearly twelve months after it had been announced by Alistair Darling: the end of 2009/10 saw a pre-emptive surge of bonus and dividend payments.
- HMRC’s ready reckoner for tax changes suggests that each 1% rise in the additional rate brings in about £200m a year of tax after the first year, implying a 50% tax might add £1bn to the Treasury’s coffers – small beer in the scheme of things.
When the Office for Budget Responsibility looked at the impact of 50% tax in 2012 it concluded that “Estimating the size of … behavioural responses is very difficult, especially for high income individuals who are likely to be more willing and able to alter their working lives and financial arrangements in response to tax changes than the bulk of the population.”