Q&A: Return of the 50p top rate of income tax?
- 25 January 2014
- From the section Business
Shadow chancellor Ed Balls has promised to reintroduce the 50p top rate of income tax for people earning more than £150,000 if Labour wins the next election.
The previous Labour government increased the top rate from 40p to 50p in 2010, but the current government cut that to 45p with effect from April last year.
So what is the 50p tax rate, and why is it such a central issue for politicians in the run-up to the next election?
What is the 50p tax rate?
Anyone receiving a "taxable" income - such as salaries, pensions and interest on savings - in the UK is subject to income tax.
After a "personal allowance" of £9,440 (due to rise to £10,000 from April) people pay according to "bands" of income.
At present income of up to £32,010 is taxed at the "basic rate" of 20%, while a "higher rate" applies to income from £32,011 to £150,000.
Under Labour's plan, half of all income above £150,000 would go to HM Revenue and Customs (HMRC), instead of 45% as at present.
Why does Ed Balls want to bring it back?
The shadow chancellor said the coalition government had given the "richest people in the country a huge tax cut" by scrapping the 50p top rate - something he said "cannot be right".
Making his pledge to restore the 50p rate, Mr Balls said "those with the broadest shoulders" should bear a "fairer share of the burden".
Labour tried to block the abolition of the 50p rate in 2012 but were defeated in the House of Commons.
How much would it raise?
Labour has not put a figure on this.
A 2012 HMRC assessment - which the Office for Budget Responsibility called "reasonable" - estimated that cutting the top rate from 50p to 45p would cost £100m a year.
But Mr Balls said the three years where the tax was imposed (after increasing the top rate from 40p to 50p) raised almost £10bn more than the assessment suggested.
Labour said the impact of returning the rate to 50p would be bigger than £100m because tax liabilities for people earning more than £150,000 in the period during which the assessment was carried out were higher than previously thought.
What do the coalition parties say?
Conservative Treasury minister David Gauke said the 50p rate would "raise little, if anything", a conclusion he said was backed up by the HMRC assessment.
Scrapping the 50p top rate in his 2012 budget, Chancellor George Osborne said it "damages our economy and raises next to nothing".
The previous year Lib Dem leader Nick Clegg had said the 50p rate should not be cut while many people were "struggling to make ends meet".
But in the same year Business Secretary Vince Cable had said the party would consider scrapping the 50p rate if there was a "good alternative", such as a "tax on very high-value property".
At the Lib Dem conference in September, activists voted by 224 to 220 against making the return of the 50p rate a party policy.
What do supporters of the 50p top tax rate say?
The Unite union said pledging to restore the 50p rate showed Labour "understands the need for a fairer taxation system".
"Voters will know now that Labour is emerging as a positive choice for this country," it added.
Richard Murphy, director of think tank Tax Research UK, said the 50p tax rate "worked" but was undermined by the short time it remained in place.
He said the UK was "seeing a massive increase in inequality" and the 50p rate would help "balance up" the economy.
What do critics say?
The 2012 HMRC assessment said the high tax rate made the UK a "less attractive place to start, finance and grow a business".
Jonathan Isaby, chief executive of the TaxPayers' Alliance, said bringing back the 50p rate would be an "unmitigated disaster for Britain".
Mark Littlewood, director general at the Institute of Economic Affairs, echoed that view, saying it would be a "disaster for both enterprise and economic growth".
And Labour peer Lord Sugar, businessman and star of TV show the Apprentice, has said reducing the tax was a "clever move".
How has the top rate of tax changed over the years?
On coming to power in 1979, Margaret Thatcher's government reduced the top rate of income tax from 83% to 60%.
This was reduced again in 1988 to 40%, and the "higher rate" has remained at the same level ever since.
But in April 2010 Labour's "additional rate" came into force, meaning anyone earning more than £150,000 a year had to pay 50p in every pound of income over that amount.
The current coalition government kept the additional rate system, but reduced the amount to 45p from last April.