U.K.'s top earners will be forced pay more tax as the rise in the tax rate to 50% from 45% takes effect from today. The new rate will affect 300,000 people in the country, who earns above GBP 150,000 per annum. The increase in the tax rate was intended to boost the country's public finances.
Most business groups responded against the move. The Institute of Directors said the proposal is superficially attractive, but it is foolish when dug deeper. The think tank argued that this policy will not help people by bringing in more tax revenue from high-income people. Nor can it be justified by reference to considerations of fairness.
"Increasing the top rate of income tax to 50% will raise little or no money, but it will send out a very bad message - both domestically and overseas," the IoD said.
Listing out the reasons why the policy should be abandoned, the IoD said one cannot compute the effect of a tax rise simply by applying the increase in the rate to the income that is currently subject to U.K. taxation. Moreover, it is very difficult to predict the effects of rate changes, mainly because of uncertainty about the effects on incomes, and also partly because of uncertainty about the future distribution of incomes.
Subject to these uncertainties, the IoD concluded that the revenue-maximising rate on incomes over GBP 150,000 might well be the current 40% rate, rather than the proposed 50%.
With the new tax rate in force, it is feared that companies may shift their operations to more business-friendly nations, which may hurt the U.K.'s government revenue.
Other changes coming into force today include a rise in child tax credits and an increase in the tax-free allowance that can be put in to individual savings accounts.
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