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Doubts raised over effectiveness of 50p income tax rate
Posted Feb 22, 2012
This week's public finance statistics show that the total tax received via the self assessment process fell compared to 2011, raising doubts over the effectiveness of the 50% additional tax rate.
Increased tax yields in all areas, aside from self assessment
In January, the total tax income from self assessment fell from £10.86bn to £10.35 billion - a drop of over £500m.
This compares with an overall increase in PAYE receipts over the same period (income from salaried employees).
Although the VAT rise from 17.5% to 20% seems to have worked (VAT is up 17.5% in January alone), and Capital Gains Tax receipts are up over a quarter as a result of the increased rates, the creation of a 50% additional tax rate appears to have failed in its aim to tax the better off.
High taxes don't always work
Commenting on the figures, Francesca Lagerberg, Head of Tax at Grant Thornton, suggests that potential targets of the additional rate may have planned in advance:
"The 50% rate should have boosted self assessment receipts in January 2012. My guess, is that because the 50% rate was flagged up in advance, many taxpayers, particularly those with their own businesses, decided to extract dividends ahead of the change (6 April 2010).
"They would have boosted the January 2011 receipts but also means that they then held back and will probably do so again until the rate comes down again. It highlights the historical fact that high tax rates don't always deliver high tax revenues."
Budget date set for 21st March 2012
We will have to wait until the next budget on March 21st to see if The Chancellor decides to axe the additional tax rate or not. He may face an uphill struggle in convincing his coalition partners to do so, without yielding on other measures, such as reducing the pension tax relief for higher rate taxpayers, or even the much-maligned 'mansion tax'.
You can view the latest tax receipt statistics on the HMRC site.
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