50p income tax could cost Govt £1bn a year

The 50p rate of income tax will cost the HMRC £1bn a year by the middle of this decade, according to a new report from the Centre for Economic and Business Research.

With a view to cutting the 50p rate completely or reducing it, Chancellor George Osborne has asked HMRC to review how much revenue it raises for the Government. Treasury estimates put that figure at £2.7bn, 70 per cent of which would remain if the rate was cut to 45p.

But the CEBR report, The 50p tax – good intentions, bad outcomes, says the figures do not take enough account of the fact people will look to minimise their exposure to the tax.

It says that when combined with national insurance, VAT and restrictions on pensions, the 50p tax pushes those who might pay it beyond a “psychological threshold”, making it more likely they will work harder to minimise their exposure.

CEBR chief executive Doug McWilliams says: “Increased globalisation and easy access to wealth management services are enabling Britain’s wealth creators to minimise their tax liability in the UK.  In the long term, this could have devastating consequences for Government revenue as more money is likely to be lost rather than gained by the higher rate tax.

“Our projections show the 50p tax is set to lose the Treasury more than a billion a year by the middle of the decade.”

It adds that to maximise the take from income tax the top rate should be 36 per cent.