High earners: Wealthy few to take the first hit from tax increases

Top rate rises to 50 per cent, while relief on pension contributions is cut
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The Government was warned it could face a mass exodus of high earners after it tore up a manifesto commitment not to introduce a new top rate of income tax.

An estimated 350,000 people will be hit by the new top tax rate of 50 per cent on incomes of more than £150,000. Meanwhile, when the new measures come into effect next April, three-quarters of a million people will see their personal tax allowances reduced by £1 for every £2 they earn above £100,000.

"This is a major attack on higher earners – for the first time in many years, an individual earning over £150,000 a year will be giving more to the Exchequer in income tax and national insurance than they keep themselves," said Toby Ryland, a partner at Blick Rothenberg.

"It is not just the fat cats who will suffer, it is also people like GPs and headteachers."

Higher-rate tax relief is also disappearing for those earning more than £150,000. The 40 per cent tax relief on pension contributions will be reduced as income rises, down to a rate of 20 per cent – the same as basic-rate taxpayers receive – for earnings over £180,000.

The new tax relief rates won't be introduced until 2011/12, but the Chancellor has introduced restrictions to stop those affected maximising their contributions in the intervening two years. High earners will be restricted to receiving higher-rate relief on £20,000 or their normal pattern of contributions, whichever is higher. The restriction is likely to be particularly difficult for self-employed savers who make irregular contributions.

The move could have serious repercussions for pension planning, warned Tom McPhail, the head of pensions research at Hargreaves Lansdown. "By breaking the link between income tax and pension tax relief, the Government is setting a dangerous precedent for the future," he said. "It isundermining important incentives to defer consumption; it has also presented us with yet more complicated pension administration rules. The Government seems to assume that anyone who earns over £150,000 can be lumped into the same boat as Sir Fred Goodwin, but that doesn't make it right to undermine their pension provision."

The measures mean Britain's high earners will see their tax burden climb to £5.3bn in 2011/12 and then to £10.1bn by 2012/13, warned the chartered accountants firm Grant Thornton. High earners will take a £2.9bn hit through the additional cost of pension tax relief, £600m through the income tax rise to 50 per cent, and £1.3bn from the impact of the withdrawal of personal allowances for incomes over £100,000.

Stephen Quest, a tax partner at the firm, said: "The changes announced represent a £10bn a year raid on the top 2 per cent of earners in the UK. It raises the spectre of an exodus of talent from the UK just when business leadership will be at a premium."

Steve Gilder, a partner at PricewaterhouseCoopers agreed. "The three main changes for earners over £100,000 – the loss of the personal allowance, the top rate of 50 per cent and the pension restriction to basic rate relief – are projected to generate a phenomenal £7bn in increased taxes in 2012," he said. "Increased tax rates do not necessarily equate to increased tax collected."

Business leaders also slammed the new 50p tax rate. Miles Templeman, the director general of the Institute of Directors said: "The increase... sends out all the wrong signals. It will have a damaging impact on the wider economy and undermine the UK's attractiveness as a place to invest.

"We are also worried about the 'slippery slope' whereby the 50 per cent rate becomes payable on successively lower incomes in the future."

Case Study: 'I welcome any change that makes the rich pay'

Donna Wakefield, 29, Mother

Donna Wakefield, 29, lives in Ashington, Northumberland, with her husband Stephen, 31, daughter Jessica, five, and son Matthew, three. She has not worked since being diagnosed with depression at the age of 18. Her husband has irregular shifts at Newcastle United Football Club.

"We receive £360 a month in housing benefit, £87 a week in income support, £92 a week in child tax credit and £36 a week in child benefit. My phone bill was £1,000 last month because of all these calls to hospital, and we couldn't pay it so they've cut us off. We got help to structure our payments from Action for Children, but without them we'd be in even more trouble. I welcome any tax changes that make the rich pay more. Stephen and I can't afford to pay 50 per cent tax; people earning six figures can. When we're in so much trouble it's right the rich do more to help out."

Didn't vote last time, and nothing said in Westminster will tempt her this time.