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BUDGET: Reduction on 50% tax

The 50% tax rate is getting a 5% haircut, following a government report which finds that the top rate has taken only £1.1 billion instead of the expected £2.6 for 2010.

Fifty-percent top rate income tax reduced to 45% following HMRC report

In last Wednesday’s 2012 budget, coalition Chancellor George Osborne announced a cut in the top rate of tax from 50p to 45p from April 2013. This follows a report by HMRC that was commissioned by the Chancellor of the Exchequer in 2011. The aim of the report was to find out how much revenue the tax actually raises.

The 50% additional rate of income tax was first introduced in April 2010 after being first discussed in the 2008 pre-budget report by then Chancellor Alistair Darling. The rate increase was initially expected to yield £2.4 billion but was criticised at the time by experts such as the Institute for Fiscal Studies.

The HMRC report was largely based on information from 2010 self-assessment tax returns (around 90% of which were available at the time of the report). It concluded that there was considerable behavioral response to the rate change including a large amount of forestalling. The report documents that the actual yield has been found to be around £1.1 billion, falling far short of initial estimates.

By reducing the top rate of tax to 45% and maintaining this level Osborne hopes to reduce tax evasion among higher earners who have been affected by the 50% rate.

This article was published in our News section on 27/04/2012.

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