Chancellor scraps 50p tax rate in favour of 45p – a step in the right direction for UK competitiveness

19 March 2012 – 

Craig Kemsley, Head of London Private Client says: “There was some welcome news for high net worth individuals in the Budget speech, which was balanced against complex and onerous rules to tackle aggressive tax avoidance. The general anti avoidance provision is to go ahead and has been a long time coming.  Better they get it right and re-consult on it than rush it and find it unworkable.”

Martin Young, Head of London Financial Planning says: "Today's changes were entirely focused on stabilising the volatile economic climate and setting out plans to calm the nerves of the savers and investors. As a result, the UK will remain an attractive place to invest which is good news for both UK companies and investors.

"The rumoured pension tax relief limitation to the basic rate of 20% once again proved to be the dog that didn't bark. Had it gone ahead, it would have felt like a tax rise for those on higher earnings and reduced the effectiveness of a relief aimed at encouraging savings."

50 pence tax rate scrapped

Kemsley said: "The Chancellor seemed adamant that the 50p tax rate sent out the wrong message for 'UK plc' and could do lasting damage to the UK economy if it were to remain permanent. As such, he has reduced the rate to 45p from April 2013 citing that there was negligible incremental revenue between a 45p and 50p rate. There was no commitment as to whether this new rate would remain permanently.  Instead, it's likely the Chancellor will assess the effect the change has had and report back how the rate could be further reduced and over what time frame. The 45p rate will go some way to retain those falling into the higher rate band in the UK and it may even encourage those who are thinking twice about moving because of the 50p rate. The one year gap on implementation will of course make many hold on to income until the tax rate falls."

Pension Tax Relief

Young said: "The Chancellor did not alter pension tax relief as many anticipated. This is good news as had this change gone ahead, it would have affected the pension contributions of higher earners and to many would have felt like a tax rise. Those paying the top rate of tax you can claim relief of up to 50 per cent on pension contributions. Not implementing this change signals that Osborne recognises the need to stimulate growth. As his speech stated, he must do something to encourage wealthy individuals to remain in the UK.

A quirk in the tax system making pensions very attractive remains open for those earning between £100,000 and £116,210 in the next tax year. Above £100,000 the personal allowance is lost at the rate of £1 for every £2 of earnings until £116,210 is reached and the personal allowance is exhausted. The effective tax rate is effectively 60% on this portion of earnings and individuals should consider making use of pension relief to avoid slipping into the high rates that impact on this narrow band of income.

Statutory Residency Test

Kemsley continues: "The statutory test of residence will be deferred until 2013 although today Osborne committed to establishing the test and announced details about how he plans to encourage wealthy non-domiciled individuals to invest in UK businesses. Considerable detail about this was provided last December.

"This is good news as the details will make the UK a more attractive place to invest and  the economy will benefit from those attracted to our shores. The UK has suffered a crisis of confidence from investors as the world economy continues to be so volatile; these measures will help to encourage positivity about our market once more."


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