Income Tax Reduction Criticised

A Treasury Committee report published last week has criticised the new 45p top rate of Income Tax, calling it “uncertain” and saying that the Government has not properly assessed the impact of its reduction.

Chancellor George Osborne had originally cut the rate from 50p to 45p as part of the March Budget, based on the assumption that the very wealthy, outraged by the 50p rate, would leave the country and pay tax abroad, whereas they might stay at the lower rate. He said at the time: “No chancellor can justify a tax rate that damages our economy and raises next to nothing – it is simple as that.”

Official analysis appeared to show that the 50p rate, introduced by Gordon Brown, was only likely to bring in £1bn, which was £2bn less than Labour’s original forecast.

However, the Treasury Select Committee, chaired by Andrew Tyrie, has now cast doubt over the rate reduction, saying in the report: “The costs and benefits of reducing the additional tax rate are highly uncertain and could be significantly more or less than the cost included in the Budget.”

But the Government has defended its decision, saying in the same report: “HMRC’s document published alongside the Budget set out in some detail the modelling behind the conclusions reached.

“It measured the forestalling impacts, which were factored into costings in the Budget. It also gave a full explanation of the modelling underpinning the tax income elasticity and considered the dynamic second round effects.

“As set out alongside Budget 2012 in the TIIN and Costing note, HMRC and HM Treasury will continue to monitor the evidence around the yield from additional rate of income tax in line with other relevant tax and benefit changes.”

As an accountant in Bristol, Elaine Durrant specialises in offering tax advice, guidance and support to businesses and individuals.

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