"HMRC will work out how much tax you are actually due to pay when you send in your 2010-11 Self Assessment tax return. This may mean you'll owe some extra tax."
Tuesday, April 5, 2011
50% tax rate announced in Budget 2009 but 2 years on and the self employed haven't paid it yet
For all the fuss about the impact of a new top rate of 50% income tax, no self employed person earning above the £150,000 threshold has yet paid tax at 50%. They need not have taken action to reduce their tax bills. It's just the way the tax system works.
Let me explain:
The new 50% rate was introduced by Alastair Darling in his 2009 Budget speech. As happens all the time now, the tax change did not take immediate effect. The first year’s taxable income to be affected was that for 2010/11 – the tax year that started on 6 April 2010 and ended on 5 April 2011.
The self employed and those living off rental or investment income pay their income tax in 3 instalments each year. When their tax liability increases it is only the final instalment that rises to reflect this. And for 2010/11 this tax will not be payable until 31 January 2012.
What about employees who pay tax through the PAYE system? Some of them also have yet to pay 50% tax. The Budget announcement in 2009 gave HMRC just a few months to establish systems to adapt PAYE codes. They were unable to do this for PAYE codes that employers used in 2010/11 where the individual had two or more employments. Instead HMRC added a note to their website for employees with income above £150,000:What does this mean?
I think it means that any research into the impact of the 50% rate would be premature. Some wealthy taxpayers may have taken steps to reduce their liability to tax at 50%. Beyond that the majority may well be thinking that it hasn't had much impact on them (yet). And that's because, despite being announced in April 2009, only high earning employees with just one job have so far paid any tax at 50%.
There is also every chance of a further uproar when unrepresented high earning employees file their tax returns and find that they owe thousands of pounds in tax. Someone earning £250,000 across two jobs for example might owe £10,000 despite paying tax through the PAYE system on both employments.