The clock is ticking

The government will increase its top rate of income tax to 50 per cent from 6 April 2010 as Britain seeks to claw back lost tax revenue caused by the deep recession. The top rate will apply to income above £150,000.

Many people would argue that high earners can afford to pay this - but, putting aside any emotive support of high taxes on the rich, will it have the desired effect of raising additional tax receipts?

Anecdotal evidence suggests not. Experience from the 1970s when income tax rates reached 80 per cent or more shows the effect of higher income tax can be counterproductive for a number of reasons:

• It encourages people to work less or take early retirement.
• Tax avoidance schemes flourish.
• People move to countries with lower tax rates.
• Investors look elsewhere rather than backing UK companies.
• High earners spend less thus reducing VAT revenues.

Whereas the government hopes to raise a net of £2.4 billion with this new tax rate, others claim that the impact on tax revenues could even be negative. It all depends on the strength of the economy and how many jobs there are in the higher income tax bracket. However, with a forecast deficit of some £175 billion annually to find, even the most optimistic predictions of tax revenues from the 50 per cent rate will only make a small dent in what is needed to balance Britain plc’s balance sheet.

So will the government have to look for other ways to increase tax revenues? And for political reasons again, will that be directed towards higher earners, in other words business owners? With most business owners currently paying capital gains tax (CGT) at a flat rate of 18 per cent on the sale of their businesses, will the government see this as a politically sound way to increase tax revenue?

With business owners in some sectors currently delaying a sale due to lower business valuations in the current climate, would they in fact be better off if they sold now, rather than be faced with a potential huge CGT tax bill?

We would like to know what you think about the above, especially the hike in income tax rate and invite you to complete our short survey by accessing the following link. Your responses and contact details will remain confidential and we will only use the overall results of the survey to help mount a PR campaign on your behalf.

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