By Daniel Hunter
The 2011 holding pattern for personal income tax rates is now seeing a return to the 2010 trend of increasing rates with the global average top personal income tax rate going up by 0.3 percent, according to analysis by KPMG International. However, the UK stands out from this global trend with plans to reduce its top rate of personal income tax from 50 percent to 45 percent next April.
The annual Individual Income Tax and Social Security Rate Survey produced by KPMG’s International Executive Services (IES) practice shows this is only the third time that an increase has been observed over the past ten years that KPMG’s survey has been produced.
“In large part, this upward tick in personal tax rates is the result of a lack of economic recovery and increasing debt concerns,” says Brad Maxwell, a partner with KPMG’s IES practice in Switzerland. “Many economies deemed it necessary to increase their highest rate of personal income tax through one of two approaches: either through the creation of new income tax rate bands for very high income earners, or through the introduction of temporary taxes to address immediate budgetary deficit concerns.”
The most prominent examples of this pointed out in the survey are seen in the recent French and Spanish reforms.
France’s reforms saw the introduction of two new tax rate bands for high income earners which has resulted in the top rate increasing from 41 percent to 45 percent. The rate increases are generally deemed as an ‘exceptional contribution’ which affects individuals reporting incomes of above EUR250,000.
Maxwell notes: “Further increases may be on the horizon, with President François Hollande planning the introduction of a 75 percent tax rate band for taxpayers earning over EUR1,000,000.”
Starting in January 2012, Spain’s ‘complimentary tax’ aims to help address the country’s public deficit. The tax applies to all taxpayers, and ranges from 0.75 percent to 7 percent depending on the individual’s income level. This effectively means that the rate of tax for individuals earning above EUR300,000 has risen from 45 percent to 52 percent.
UK bucks the trend
The UK is bucking the global trend for raising the top rate of personal income tax with its highest rate scheduled to be reduced from 50 percent to 45 percent next April.
Even before taking this reduction into effect, the UK’s position relative to its European Union peers moved down the rankings in 2012. The UK moved from having the equal 4th highest rate to equal 5th as Spain jumped from 10th to 3rd highest by increasing its headline rate from 45 percent to 52 percent. The UK’s relative EU position is likely to move further down the table when changes to the headline top rate in France take effect and the UK’s rate changes to 45 percent.
At 45 percent, the UK will be closer to the EU average which, on a purely arithmetical basis, is just over 37 percent and, if weighted for the different size of populations in the various countries, is 42 percent, according to KPMG’s calculations and Eurostat data.
“The 50p rate was always described as temporary and so a firm commitment to its reduction was very welcome to businesses and entrepreneurs," Marc Burrows, head of international executive services at KPMG in the UK, commented.
"Being ‘open for business’ is not just about the corporate tax regime. Personal tax is a major issue for entrepreneurs, high net worth individuals and senior executives, many of whom can and do exercise considerable discretion over where they choose to locate.”
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