Where have one million higher rate taxpayers gone?

Friday, June 26, 2009 | Posted by: Richard Jameson
Categories: Protecting your wealth | Tags: Richard Jameson, super tax, high net worth individuals, higher rate taxpayer, stealth tax, 50% tax rate

The number of higher rate taxpayers is set to fall by one million individuals, according to the UK tax authorities  – down 25% from an estimated 3.89 million in 2007/08 to 2.9 million in 2009/10, with a fall of almost £13 billion over the same period (around 9% of total income tax receipts). What does this mean for you as a higher rate taxpayer and the rest of the taxpaying public? And will other taxes have to rise to compensate?

To my mind, there are several reasons why this has happened:

• Primarily, the recession has had a dramatic effect on the number of highly paid jobs, particularly in the City where bonuses have been slashed, and as unemployment bites, so too does the number of top taxpayers.
• The effects of fiscal drag have ceased in the past 12 months. Fiscal drag is where earnings’ inflation generally outstrips increases in tax thresholds and allowances, thereby dragging an ever greater number of individuals into higher rate tax bands. This tactic, often dubbed a form of stealth tax, has been a popular tool of many a chancellor.

The reason for this is that as inflation has ground to a halt with the collapse in the Bank of England base rate in recent months, earnings are set for a period of stagnation, rather than ongoing inflation. However, at the same time, income tax personal allowances and tax bands increased significantly in April 2009 as they were set by reference to a relatively high rate of inflation in September 2008. The combined impact of stagnating earnings and increased tax allowances and bands means that a number of taxpayers drop out of the higher rate bracket.

• With the 50% tax rate on the horizon, the number of internationally mobile individuals who are upping sticks and leaving the UK is set to increase in the coming months. And then there is what we cannot measure, the ‘black hole’ – the number of high net-worth individuals who considered coming to the UK and have now opted against it.

So what does the fall in top income taxpayers mean for all taxpayers?

With the onset of the recession, a fall in tax revenues was expected, but not at such a sudden rate with a dramatic impact on the Government’s income tax revenues. Income tax and national insurance are the two most significant contributions to the Government’s coffers. However, with the Government’s debt burden set to soar in the next decade, it will have to plug the gap elsewhere. Given there will be just under 30 million income taxpayers, and of those, an estimated three million will be higher rate taxpayers, it is not unreasonable to expect the current or a future Government to balance the books by spreading the pain across the board.

There is a feeling among the highest earners that the new 50% rate from April 2010 opens the door for yet further tax hikes. Coupled with the new higher national insurance contributions, this will introduce a marginal rate of 51.5% from April 2011 above £150,000, and few wish to take home less than half they have earned when many can work abroad in much more attractive locations.

However, it is not only revenues from this group of taxpayers that the UK will be missing out on – it is the wealth generation that follows, and the associated tax revenues. It may be that the Government is forced to rethink its super rate of tax, because as well as the top rate taxpayers voting with their feet, the UK also faces losing a considerable amount of cream off the top.