UKs cut in top rate income tax biggest in world

The average income tax rate increased again this by 0.3% but the UK has bucked this trend with the largest reduction worldwide of a top rate of income tax, with its cut from 50% to 45%, effective 6 April 2013, reports Harris & Co accountancy services.

KPMG International says that the reduction across all global jurisdictions and also takes the UK from the 5th to 11th joint highest rate among its peers within the EU.

Latvia decreased its flat tax rate by 1% as part of a staggered move to reduce its rate from 25% to 20% by 2015, and Greece decreased its top rate by 3% (from 45% to 42%). While the top rate did decrease in Greece, the change was part of a wider move to restructure all tax rate bands. These changes saw tax rates increase at the lower and middle levels, to the extent that tax rates actually increased for all individuals earning under EUR 220,000 (despite the decrease in the top rate).

Marc Burrows, head of International Executive Services at KPMG in the UK, said that dropping the UK’s top rate enhanced the UK’s attractiveness to internationally mobile executives, as did a number of recent corporate tax reforms and rate cuts.

Burrows commented:

‘In our view there is a point at which tax rates can squeeze taxpayers too hard and act as a disincentive to growth and investment. At 50%, the UK was probably at that point and lowering the rate thus removes this barrier to an extent although 45% is not the lowest rate around by any means.’

‘It’s important to remember that it’s not all about tax; the UK has a number of other attractions and is a very popular destination for senior globally mobile businesspeople. They like the culture here, the cities, the countryside, the shopping, the education system and even the weather. Amongst all these factors, the tax system too, plays a significant role in deciding where to locate so ensuring that we can compete on the global stage is crucial’

The most highly publicised tax rate change for 2013 occurred in the US, where the expiration of Bush administration era tax cuts saw the highest federal rate increase from 35% to 39.6%.

However Slovenia holds the title of the greatest change moving up from 41% to 50%.

René Philips, the firm’s head of international executive services, said:

‘Targeting high income earners is a way for governments to gain revenue and be seen by taxpayers as doing something that is fair and necessary for the betterment of their country.’

India is one example to note with its introduction of a new temporary tax on high earners, KPMG said - for the 2013/14 fiscal year only, India has imposed a 10% surcharge on tax paid by individuals earning over INR1 million (£10,121). Similarly, the Czech Republic put in place a temporary tax, referred to as a ‘solidarity surcharge’ and applied at a rate of 7% to income exceeding CZK1,242,432 (£41,125).

In addition, Japan increased its highest rate by 0.84% due to the introduction of a ‘Special Reconstruction Surtax’ which the Japanese government introduced to help fund the cost of rebuilding after the Great East Japan Earthquake of 2011.