When Chancellor Kwasi Kwarteng announced the scrapping of the 45p tax rate, it provoked a storm of criticism. Today, only days after proposing the change, he was apologising and announcing a U-turn. This is a mistake. 

Opposition politicians and the British media have misrepresented the reality of tax in this country, and failed to understand the central importance of high-earners to the UK economy, and the balance sheet of the treasury. 

The UK relies very heavily on the taxes paid by the top 1.7 per cent of earners

Whether we like it or not, the UK relies very heavily on the taxes paid by the top 1.7 per cent of earners. If we want to keep providing the current level of health, education and welfare services to the rest of the population we have to ensure we have enough wealthy taxpayers.

One way to do this is to “grow our own”. The mini-budget supports entrepreneurs who establish businesses in the UK by increasing the Seed Enterprise Investment Scheme and the annual investment allowance and encouraging institutional investment into innovative Scale Ups.

Another way is to keep established companies paying tax in the UK by not increasing corporate tax rates or employer’s National Insurance contributions.

Finally, we can encourage high earners to live and work in the UK by removing any caps on their earnings and having a competitive income and property tax policy.

Why do we need the Rich?

There are surprisingly few higher rate taxpayers in the UK. In 2021/22 a mere 563,000 people paid the additional 45 per cent rate, that is only 1.7 per cent of all UK taxpayers and about 0.8 per cent of the UK population. But despite making up such a small part of the population the additional rate taxpayers are expected to pay 36 per cent of all income tax in 2022/23 (£89.2bn out of £251 billion). The economy relies on the tax contribution of this tiny proportion of the population. If they left the country, we would all have to pay a lot more tax or get used to much lower levels of public services.

What’s in it for them?

There is a lot of competition for high earning individuals. Other financial centres have much lower taxes: In the US someone earning $170,000 (£153,000) has a federal income tax rate of 32 per cent while the top US rate of federal income tax is only 37% and only on income over $539,900 (£486,000). In Singapore, income taxes are even lower: someone earning over S$240,000 (£150,000) pays 19.5 per cent income tax while in 2024, Singapore’s top tax rate will be 24 per cent on earnings over S$1 million (£624,000), with 19.9 per cent paid on earnings below this level.

Attracting more high-earning bankers … back to London is important

Attracting more high-earning bankers away from New York and Singapore and back to London is important. Not only do the top 1.7% of earners in the UK pay 36% of our income taxes — they cost the government very little. Bankers mostly send their children to private schools, use private doctors and hospitals, private housing and have private pensions. Lowering taxes and attracting more high earners to Britain might help balance the books and would send a powerful signal that Britain is once again fully open for business.

So, it is helpful that the government has also removed the cap on bankers’ bonuses. Bankers are not employed by the government so why would the government want to limit their earnings? The Government is already charging banks an 8% tax surcharge above the normal corporate tax rate, although the surcharge allowance is being increased from £25million to £100million which will help restore London’s financial competitiveness.

Beside the tax cuts, a cheaper currency will also make the UK a more competitive place to do business. A lower currency relative to the US dollar is not the bad thing it is portrayed to be by the mainstream media, but simply a consequence of having a floating currency.

A relatively lower currency will: boost our exports especially to our largest export market — the USA; encourage UK consumers to buy domestically-produced goods; attract foreign direct investment, especially for developing our oil and gas reserves; and help industries on-shore production that has been moved to countries with cheaper currencies.

What else could make the UK more attractive to higher earners?

However, there are costs which discourage wealthy people from setting up home in London. Most noticeably, the high cost of housing in Central London, made even higher by Stamp Duty. Most foreign bankers need to live in Central London but if they own a property in their home country, they will be paying 15% Stamp Duty on top of the price of the house.

For example, a successful banker who may want to buy a £5 million terraced house in Kensington would have to pay £525,000 in Stamp Duty alone. If they want a bigger house costing £10 million, then they would have to pay £1,275,000 in Stamp Duty. No surprise that bankers are now more likely to rent than buy property in London. It is worth noting that there is only a 1 per cent tax on property purchases over $1million in New York City — the main financial centre to rival London.

Bankers and high earning individuals can move just as easily as financial transactions in our digital world. So without these tax changes, they may simply stay in New York and Zoom in when required. Would it benefit us if Americans could make use of their taxes instead? Quite the opposite. We should welcome the rich instead of driving them away.