New 50% tax rate comes into force for top earners

The 50p income tax rate is for taxable incomes of £150,000 or more

A new 50% tax rate for top earners has come into force at the start of the financial year.

The new rate will affect the 300,000 highest earners in the UK, out of the 29 million people who pay income tax.

It will be levied on taxable incomes greater than £150,000 a year and aims to raise an extra £2.4bn by next year.

The 600,000 people who earn more than £100,000 a year will have their personal tax allowance eroded too, raising £1.5bn for the government.

Together with increased tax on pension contributions, which starts next year, the UK's top 600,000 earners are expected to be paying an extra £7.5bn a year in tax.

Tax warning

The new 50% income tax rate is aimed at boosting public finances.

But the Institute of Directors (IoD) argued that the new rate would damage business confidence, foreign investment and entrepreneurial aspiration.

Francesca Lagerberg, of Grant Thornton: "It's a small minority being really hit"

"We believe the 50p rate is likely to raise little or no tax overall in the short-term, and lead to lower overall tax revenues in the medium to long-term," said an IoD spokesman.

The directors' organisation argued that some high earners would move abroad to countries where tax rates were lower.

It added that some directors of multinational companies might be tempted to move their headquarters abroad too, thus reducing the scope for the government to levy corporation tax.

Patrick Stevens, a tax partner at the accountants Ernst & Young, said that while high earners who stayed in the UK would pay more tax, there would be fewer of them.

"They will leave the UK or not come to the UK," he said.

"Undoubtedly fewer people are coming [to the UK], to make up for the normal leavers, so the population of those high earners is going down."

In other changes brought in at the start of the new tax year, child tax credit has been increased by £20 a year.

The amount of money that people aged under 50 can save in an Individual Savings Account (ISA) has also gone up from £7,200 to £10,200 in a financial year. Half of this can be saved in cash, with half, or all, in stocks and shares.

Those aged over 50 have benefitted from the new ISA threshold since October 2009.