The Chancellor insists his cut to the top rate of income tax will make the UK more competitive while new rules on uncapped reliefs will stop wealthy individuals avoiding millions of pounds of tax.
In last week’s Budget, George Osborne revealed the top rate of income tax would come down from 50p to 45p from April 2013. He also announced a cap on income tax reliefs that were previously uncapped of £50,000 per year or 25 per cent of an individual’s income.
Responding to Osborne’s Budget, Labour leader Ed Miliband attacked the top rate tax cut as benefiting “millionaires at the expense of millions”.
Giving evidence to the Treasury select committee today, Osborne said: “The 50p rate was higher than France, Germany and Italy. It raised very little money and should we keep a rate seen as uncompetitive just so politicians can feel like they are doing something?”
He gave examples of how under the outgoing income tax relief system, people earning £10m or £20m a year could use unlimited reliefs to reduce their income tax bill from 50 per cent down to zero.
He said: “I asked HMRC for stylised examples of some very wealthy people’s tax affairs. This stylised individual could have an income of £10m and under the tax system I inherited, claims loss relief for £5m, charitable relief for £4m and qualifying loan interest for £1m. Their average income tax rate for the year is 0 per cent and therefore they pay no income tax.”
“All I am doing is capping currently uncapped reliefs and that will mean for people on incomes of £10m they will not be able to reduce their income tax rate to 0 per cent.”
In his Budget speech, Osborne said he considered aggressive tax avoidance as “morally repugnant”. He told the committee that as a result of all the measures in the Budget the very wealthiest would be paying five times more tax than they were paying before.
Treasury permanent secretary Nicholas Macpherson told MPs that since the introduction of the 50p rate in April 2010, the amount of revenue lost due to tax planning was higher than expected.
He said: “We assumed two thirds of the revenue would disappear through tax planning. As this document [HMRC’s review of the 50p rate] sets out 83 per cent disappears through behavioural responses.”
TSC member and Tory party deputy chairman Michael Fallon pressed Osborne as to whether, like the 50p rate, the 45p rate is considered as temporary. Osborne said all taxes are kept under review but he refused to give it the “special status” that was afforded to the 50p rate.