Will the Higher Rate Tax Drive UK Entrepreneurs Away?

Last Updated Apr 6, 2010 1:32 PM EDT


High-earning employees and bosses today face a 50p tax rate, bad news for employers if you believe the Institute of Directors. It has produced a report on how the higher tax rate hurts even employers earning less than the minimum £150,000 a year that triggers it.

Policy adviser Corin Taylor claims the high-earners' tax will have a "significant indirect impact" on businesses and on the economy, and what the UK gains in revenue will be outweighed by lost interest from inward investors as well as a potential exodus of highly-paid talent overseas.

There's also a belief that such an unfavourable tax will put multinationals off locating in the UK -- any tinkering with the tax system's considered an annoyance at best, and at worst an indication of a culture that punishes wealth creation if it's deemed politically expedient to do so. (Although I've yet to hear any opposition party promise to repeal the 50p tax if they win the election.)

In fact, tax planning or outright relocation among high earners will result in a shrunken income tax base overall, argues the IoD.

There are some practical, legal steps higher-tier earners can take to save themselves from the 50p rate. There are three main options for those with a significant stake in a business, according to Leonie Kerswill, tax adviser for PricewaterhouseCoopers.

  1. Leave your profits in the company, where the tax rate's a more manageable 28 percent and don't draw down so much in salary. Depending on your exit plans for the business, you might end up paying considerably less than you'll pay if you run the company and take a dividend (54 percent) or salary (56.5 percent). In fact, it's been argued that the Budget's extension of entrepreneurs' relief is a boon for UK business, encouraging owner-managers to reinvest for the longer term.
  2. Look at Efurbs -- Employer Financed Unapproved Retirement Benefit Scheme -- which are set up by the company as alternative pension arrangements and are taxed at 28 percent. Since money's 'parked' in an offshore vehicle until retirement, this is less likely to suit a 35-year-old director than a 53-year-old one.
  3. Leave the country. Take your earnings overseas until the 50p rate's lifted (but don't count on a change of government doing so.) Kerswell foresees a potential summer exodus as high earners without family ties who've not got organised for today's change decide to work abroad for a few years.
This is where the UK could lose big, say start-up champions. It may seem fair to make the rich pay more to bring the UK's economy back from the brink, but unfortunately, it may backfire by discouraging the hardest working high-earners, entrepreneurs, who have less incentive to risk it all if they lose a chunk to the Man each year.

Pimlico Plumbers' Charlie Mullins has already threatened to go. Will others follow -- or are fears of a talent/enterprise exodus empty frets?

(Photo: howard lake, CC2.0)