Top earners have been rewarded in the 2012 Budget as plans to decrease the top rate of income tax were revealed.

Chancellor George Osborne has announced a reduction in the top rate of income tax from 50p to 45p, a move which will come into effect in April 2013.



Speaking to the House of Commons, the chancellor said that the 50p tax rate ‘damages our economy and raises next to nothing’.



The rate, which is paid on earnings of over £150,000, was announced alongside a raise in the amount of tax-free earnings to £9,205 starting in April 2013. The change will be offset by new measures such as an adjustment in stamp duty.

Osborne explained that five times as much would be raised from the wealthiest by other tax and anti-avoidance measures which are set to be brought in.



Vince McLoughlin, partner at business, tax and charity advice firm Russell New, says that the chancellor had limited scope to manoeuvre at this time of deficit reduction and spending cuts, not to mention the economy on a path to yet another recession.



He adds, ‘One of the issues that Osborne had to deal with was the call for the early scrapping of the 50 per cent tax rate. This was always going to be a temporary measure and by getting rid of it now, he has given another signal to the entrepreneurs of Britain and indeed the world that Britain is a place in which in invest and set up business.’

Findings from HMRC has found that £16 billion of income was deliberately shifted into the previous tax year to avoid the top rate and that the Labour government led increase from 40p to 50p raised just a third of the £3 billion it was expected to.



Tony Medcalf, tax partner at Moore and Smalley Chartered Accountants and Business Advisors, comments, ‘By cutting the 50p top rate of tax, albeit not until next year, George Osborne has taken a big political risk.

‘However he will argue that the decision to accelerate the increase in the personal allowance to help those on more modest incomes, taking some people out of income tax altogether, shows he’s not just helping the wealthy.’
 


Medcalf believes that the move to reduce the top rate will send a message out that the UK wants to be competitive as a business location, one which encourages entrepreneurialism.