It may position him for a political battering but George Osborne scrapped the 50p tax rate for top earners – and drew praise from the Midlands professional community.
As widely expected, the chancellor cut the top rate of tax by 5p to 45p, claiming it was holding back people from investing in Britain.
The move is a political hot potato – and drew criticism from Labour leader Ed Miliband and union bosses – but business leaders in the West Midlands have given the move their backing.
However, they predicted that companies will choose en masse to delay bonus payments until next year, as the cut comes into force on April 13.
Tom Downing, at Deloitte Midlands, said: “This move is welcome – and not surprising, given that HMRC’s own study suggests that increasing the top rate of tax to 50p failed to deliver the extra tax receipts that had been intended. The new rate is internationally competitive with the US, where it is 45 per cent, France, where it is 48 per cent, and Germany, where it is 46 per cent.
“In the short term, though, high earners still face an effective personal tax rate, including National Insurance, of 52 per cent the Government recognises that, for owner managed businesses and others, it is relatively easy to manage the timing of remuneration and bonuses over and above basic salary and has allowed for this in the Budget calculations.
“In practice, we can expect a trend to deferring payment of bonuses to high earners until after April next year to take advantage of the lower tax rate.”
Mr Osborne said the 50p rate had distorted the economy by encouraging tax avoidance, and cutting it to 45p would only cost the exchequer £100 million. “It raises at most a fraction of what we were told, and it may raise nothing at all,” he insisted.
Graeme Crawford, leader of Ernst & Young’s tax practice in the Midlands, said: “The UK’s arrivals lounges are likely to be booming next year as entrepreneurs respond to a far more positive message from the Chancellor.
‘‘In his speech, the Chancellor has matched his reforms of the business tax environment by addressing the much maligned 50p rate. By removing this deterrent, the Chancellor has put the substance behind his rhetoric; the UK is open for business.
“HMRC’s report showed that the first year of the 50p rate generated far less for Treasury coffers than expected, demonstrating the pervasive image that it had portrayed of the UK.
“The Chancellor pointed out that a rate of 45 per cent brought in broadly the same amount of revenue, without all the negative baggage.”
Mark Burgess, head of tax for DLA Piper in Birmingham, added: “While the Chancellor will no doubt take a political battering over the announcement that the top rate of income tax will be reduced from 50 per cent to 45 per cent, it is questionable whether the actual cost to the country of such a reduction is significant when compared to the message delivered to the outside world that Britain is “open for business”.
“However, delaying the 45 per cent income tax cut until 2013 will inevitably lead to some individuals trying to shift income into the next tax year.
‘‘If the Government do not address this issue then it would seem like a significant oversight, as the Chancellor was keen to criticise the Labour government for a similar consequence when they introduced the 50 per cent tax rate, leading to a significant shifting of income into the previous tax year.”