High earners hit with 45% income tax

Canary Wharf

The UK’s highest earners are perhaps the biggest losers from this year’s pre-Budget report, as chancellor Alistair Darling confirms that a third rate of income tax will be introduced for people on more than £150,000 a year.

From April 2011, those earning £150,000 will have to pay 45% in tax on their earnings, a move that will hit the top 1% of earners in the UK. Darling claimed that the measure was necessary because those with the highest incomes have seen their earnings almost double since 1996.

In addition, those with incomes of between £100,000 and £140,000 will have the value of their personal allowance reduced to that of a basic rate taxpayer in April 2010, which Darling estimates will affect the top 2% of earners.

“Without doubt, the highest earners are this year’s biggest losers,” says Malcolm Cuthburt, managing director of financial planning at tax experts Killik and Co. “It will not do much for the economy, and will in fact discourage high-net worth individuals such as non-domiciles from living here in the UK.”

Ben Wilkins, director of human resources at PriceWaterhouseCoopers (PwC), argues that the move will hurt the economy, rather than help it.

"This could have a real impact on industries where there are more opportunities for talent to mobilise and move elsewhere - for example, knowledge-based industries such as technological or financial services. As a result, UK companies that rely on hiring high-earning talent will have to think increasingly about how to attract top performers."

Clive Mackintosh, head of private clients at (PwC) agrees: "This will make the UK less competitive for internationally mobile businesspeople and entrepreneurs. Darling has made the top rate of tax higher than in nearly any other advanced economy."

Cuthbert explains that the actual rate high earners will pay works out to be more than 45%.

“If you take into consideration the 1% hike in income tax Darling introduced last year, and add the planned 0.5% increase in national insurance contributions also planned for 2011, these high earners will in fact be paying 46.5%, not 45%,” he says.

As a consequence, Cuthbert expects to see an increase in people looking to shelter their money from the taxman, such as increasing pension contributions and venture capital trusts.

Currently, the maximum fund that can be built up in a tax efficient way (the lifetime allowance) is £1.65 million (2008/09). Any excess over £1.65 million is taxed at 55%, but this excess amount can be taken as a lump sum.

John Lawson, head of pensions policy at Standard Life, believes that 55% may seem like a price worth paying to get pension tax relief.

"The UK's highest earners now have an added incentive to shelter their income within a pension. Longer-term investors may even want to deliberately exceed the lifetime allowance and pay a 55% tax charge, as this may produce a better return than investing in an equivalent mutual fund."