Bonuses increase Treasurys tax take

In March 2012 George Osborne and his Treasury advisors took a risk. They announced that on 6 April 2013 they would be reducing the additional rate of income tax from 50% to 45%. The Treasury was criticised at the time because the expected tax take from higher income earners was expected to fall in line with the reduction in the 50% rate. What the pundits underestimated was the incentive that the rate reduction offered to release bonuses that were not taken in the 2012-13 tax year.

Official figures for the growth in annual earnings shows that in April 2013 bonuses were up over 60% on a year earlier. Additionally, receipts from income tax and capital gains tax in the first quarter, April – June 2013, increased from £30.8bn (April – June 2012) to £33.6bn.

A significant proportion of this increase can be attributed to income shifting – delaying bonuses for the 2012-13 year until the rate dropped on 6 April 2013.

This would seem to demonstrate that high income earners have far less resistance to paying tax at a marginal rate of 45% than 50%. It also lays the ghost that rails against tax decreases on the basis that this will inevitably lead to a reduction in taxes collected.