Did cutting the 50p rate of tax raise £8 billion?

“Figures published this morning by HMRC contain, for the first time, the income tax data for 2013-14, which was when the 50p rate was reduced to 45p.

“The data reveal that in that year there was an £8 billion increase in revenues from additional-rate taxpayers, which completely defies the predictions made by the Labour party at the time”.

George Osborne, 1 March 2016

The top rate of tax was reduced from 50p per pound to 45p in April 2013. When the policy was announced, Labour criticised the government’s prediction that the overall cost would be £100 million a year, calling the assumptions behind the figure “heroic”.

The total amount of tax collected from additional rate taxpayers rose from £38 billion in 2012/13, to £46 billion in 2013/14—a rise of £8 billion.

But this doesn’t mean that the lower tax rate has brought in £8 billion in extra revenue, as experts such as tax barrister Jolyon Maugham and the Institute for Fiscal Studies have pointed out.

At least some of the £8 billion rise can be explained by the ‘deferral’ of income by additional rate taxpayers between 2012/13 and 2013/14. They pushed some earnings back to 2013/14, when the 45p rate took effect, so that they would pay the lower rate of tax on it.

The comparison ignores ‘deferral’ effects

HMRC said last year that the reduction of the additional rate of tax in April 2013 had led to the postponement or ‘deferral’ of income from 2012/13 to 2013/14. It predicted this would happen when the change was being planned, forecasting that roughly £6 billion would be delayed.

So, as Mr Maugham puts it,

“tax receipts were artificially low in 2012-13 (because people delayed receiving income until rates fell) and were artificially high in 2013-14 (when those delayed receipts were received).”

He says this delaying tactic “is likely to explain most or all” of the difference. 

The government predicted that the rate reduction would cost £360m over five years

Mr Maugham argues that the best way of seeing what effect the reduction in the rate has had is by comparing receipts now to what receipts would’ve been if the tax rate hadn’t been reduced.

The government did some projections of this before the cut. It predicted that cutting the rate would cost £360m over five years—with a loss of £50 million 2013/14, £100 million in both 2014/15 and 2014/15 and £110 million in 2016/17.

Those estimates include predictions of how people might change their behaviour as a result of the change. High earners were expected to increase the amount of taxable income they declared as a result of the rate reduction. These were and are still uncertain estimates. 

Head of the IFS, Paul Johnson, told the BBC Daily Politics earlier this week that

“The best estimate is that it looks like by cutting the top rate from 50p to 45p, it might have cost you a very small amount, probably… it’s not bringing in lots of additional revenue but it’s probably not costing much either.”