Darling sets his sights on higher earners

For several weeks, higher rate taxpayers have been told to brace themselves for a Budget with its sights set on parting them from their money.

The Chancellor has come under pressure to find funds for the government's borrowing programme from the country’s highest earners.

But the measures to raise income tax and curb pension relief have been seen by some accountants as a continuation of the government’s policy to increase personal taxation for wealthy individuals.

Alterations to the UK’s fiscal regime has left some higher rate taxpayers facing a marginal rate of tax three times higher than the basic rate.

With a raft of new measures to close down avoidance schemes, those hoping to mitigate tax increases by employing esoteric forms of planning have been warned to tread carefully.

But it is the announcement of a new top rate of income tax that has heralded the end of an era.

When Labour came to power in 1997 they did so pledging not to raise the top rate of income tax. Over the course of a decade, high earners have subsequently paid no more than 40 per cent on money they received in income.

Peter Mandelson’s prouncement that he felt “intensely relaxed about people becoming filthy rich” was repeated as evidence that the government would not punish wealth and that Britain was ready to welcome rich immigrants with open arms.

But when the government announced at the end of 2008 that it was imposing a new income tax levy of 45 per on all income over £150,000 everything changed.

The Chancellor’s decision to raise this rate to 50 per cent and bring forward the start date to April 2010 means that, in less than a year, high earners will face an increased top rate for the first time since 1988. When combined with National Insurance, they will pay a tax rate of 51.5 per cent on their income, according to Ernst & Young.

Since Labour came to power, the thresholds and allowances for various personal taxes have increased with inflation, but as earnings have outstripped the retail prices index (RPI) a greater number of individuals have been dragged into the higher rate earnings tax bracket.

One of the most striking aspects of the Labour government has been the rise in the number of higher rate taxpayers from just over 2m to over 3.8m now, according to figures from accountancy group UHY Hacker Young and HM Revenue and Customs (HMRC).

The government’s decision to curb tax free personal allowances for those earning more than £100,000 will result in a number of this group paying a marginal rate of income tax of 60 per cent on income over this threshold.

High earners are also facing increased contributions in National Insurance.

Since 6 April 2009, when the upper earnings limit for National Insurance was aligned with the higher rate threshold for income tax, taxpayers with income over £37,400 have been making larger contributions. These will increase again in 2011 when contributions rise across the board by 0.5 per cent.

Meanwhile the perks associated with larger payments of income tax have been restricted.

Public antipathy towards the wealthy elite has been strengthened by news of bankers pocketing large pensions while the retirement incomes of those with more modest savings plummet.

Those who pay 50 per cent on income will not receive an equivalent level of relief on their pension contributions, and pension relief will be capped in 2011.

The changes are likely to lead to an increase in the number of savers who use salary sacrifice arrangements, which allow members to give up part of their salary or in exchange for an amount into their pension scheme, according to John Lawson, head of pension policy at Standard Life.

UK households which opted to use property as a form of retirement saving in order to take advantage of the protracted housing market boom have also faced increased taxation, according to John Whiting, tax partner at PricewaterhouseCoopers.

As the prices for properties have risen, significantly more homes have been dragged into the higher stamp duty rates. Stamp duty for homes worth £500,000 has doubled to 4 per cent and owners of homes worth between £250,000 and £500,000 now pay 3 per cent.

Over the decade to 1997, stamp duty receipts from the sale of homes rose tenfold according to estate agency Savills, while the income from inheritance tax on residential property sales quintupled.

But those with second homes have been one of the few wealthy beneficiaries of tax changes.

When the chancellor decided to remove taper relief for capital gains tax in April 2008, he effectively reduced the tax payable to sales of second homes from a possible 40 per cent to a flat rate of 18 per cent.

Business owners were less fortunate. Abolishing taper relief penalised those selling a business they had owned for a number of years by raising their tax bill from 10 per cent to 18 per cent. Entrepreneurs relief allows company owners to keep the first £1m of profits made, but this is a once in a lifetime allowance.

Richard Mannion, national tax director at accountants Smith & Williamson say wealthy individuals should take the creation by HMRC of a unit targeting the wealthy seriously. Offering the wealthiest taxpayers in the UK with a “better” service can mean only one thing: higher tax bills.