Page last updated at 17:29 GMT, Wednesday, 22 April 2009 18:29 UK

How Labour aims to tax the rich

By Ian Pollock
Personal finance reporter, BBC News

Reading a tax return
There is much to digest for the richest tax payers

Taxing the rich is one of the clear themes of this year's budget.

Bringing in a higher 50% tax rate for those earning more than £150,000 a year, and increasing the tax rate of trusts will have no effect this year.

Instead, along with the phasing out of personal tax allowances for those earning over £100,000, these changes start in 2010.

The Treasury's Red Book estimates the changes will raise £1.23bn that year, and nearly £2bn in 2011-2012.

In that year as well, the restriction of pension tax relief for those earning more than £150,000 a year will bring in another £200m.

By a long way, these changes for the highest earners are the biggest tax raising measures in this year's budget.

Giveaway

For the current tax year, 2009-10, the government is in fact giving away taxes and will forego nearly £5.2bn of tax.

This would mean someone having no personal allowance at all, once their income reaches about £113,000

But by 2011-12 that position will be reversed, with today's changes bringing in an extra £5.2bn, nearly half of which will come from the tax and pension changes to the highest earners.

Back in 1973, the then Labour chancellor Denis Healey became famous for warning he would squeeze the rich until their pips squeaked.

In fact what he actually told that year's Labour Party conference was: "I warn you that there are going to be howls of anguish from those rich enough to pay over 75% on their last slice of earnings," but the message was the same.

And Alistair Darling is having a more restrained go now, more than 35 years on.

Just to rub it in, the tax rate on income from trusts will now go up from 40% to 50%.

Not everyone who benefits from a trust is rich, but trusts were a well established method of wealthy families passing on their money, though the tax advantages have been eroded by successive budgets.

The changes

In detail, the main changes are that:

• the income tax personal allowance will be restricted for people whose incomes are over £100,000, from April 2010. For every two pounds they earn above that level, they will lose one pound in personal allowance.

Currently this would mean someone having no personal allowance at all, once their income reaches about £113,000.

• an extra, higher, rate of income tax of 50% will apply to incomes above £150,000 from April 2010; and

• tax relief on pension contributions will be restricted from April 2011, for those people with incomes of £150,000 and over, and will reduce steadily until it is 20 per cent. That means the 40% tax relief will disappear completely once someone's income hits £180,000.

Dodging the pension rules?

The government has anticipated that some people earning more than £150,000 a year may try to stuff their pension schemes with lots of spare cash in advance of these tax changes.

There are 28 pages of guidance for individuals alone on these "forestalling" measures

To stop that, the Treasury has published a set of complicated rules which come into effect immediately.

There are 28 pages of guidance for individuals alone on these "forestalling" measures.

But in essence they aim to stop the highest earners from adding more than £20,000 a year to their pension pots, unless this extra cash was part of their normal pattern of pension contributions anyway.

"Protecting revenue"

Anyone lucky enough to be in the top 1% of people earning more than £150,000 a year will need some expert advice.

They are not the only ones.

Under the general heading of "protecting revenue" the tax authorities are bringing in a variety of other measures which will raise in theory, another £555m in 2011-12.

Among these are naming and shaming serious tax defaulters - people who have tried to evade £25,000 of tax.

And making senior financial staff in large companies personally responsible , from next year, for any mistakes in their company's tax returns.



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