A further hint by UK finance minister George Osborne that he may axe the 50 per cent top rate of income tax on high earners has drawn praise from Laven Partners, consultants in the alternative investment sector, saying this will revive the UK’s financial industry.  

The top rate was introduced under the previous Labour-led administration shortly before the 2010 general election on those earning £150,000 (around $244,136) or more. At the time, some in the financial services industry warned it would drive some high earners abroad and deter such people from working in the UK. In his March budget this year, Osborne said that the 50 per cent tax band was a temporary rate and would eventually be scrapped, but he did not spell out exactly when.

“If the high income earners tax bracket is cut, it would not only help the economic recovery of the UK as a whole but hopefully also boost the flagging hedge fund industry of London. Increased taxation and regulation as well as the financial crisis have all contributed to fewer managers starting their businesses in London and employing fewer people,” said Jerome Lussan, chief executive of Laven Partners.

The introduction of a new, higher rate income tax band has re-ignited debate around the idea that higher marginal rates of tax – the added “bite” of every additional sum earned over a threshold level – reduce, rather than raise, revenues.  Over the past two decades, countries in the 30 nations of the OECD have cut average top tax rates (source: CATO Institute, Washington DC). In 1980, the average top rate was 68 per cent, falling to 42 per cent in 2007.

Laven’s Lussan said that although the top rate has not caused a mass stampede from the UK to locations such as Switzerland or Singapore, it has had a damaging impact.

“We haven’t seen an exodus of managers out of London despite the initial predictions, however start ups are certainly significantly less numerous than what they were pre-crisis and the tax question comes up often for entrepreneurs in this sector,” Lussan said.

“If the 50 per cent tax bracket is removed, we believe it will have a positive impact on hedge fund managers and hopefully ensure London will continue to retain its financial services industry over the long-term,” he added.

The comments come ahead of UK gross domestic product data expected to show that the economy remained in the doldrums in the second quarter.

While the 50 per cent tax rate remains in place, the UK government has moved to encourage wealthy individuals to live and invest in the UK through such measures as clarifying its definition of "residence" and "domicile". 

“The jury is still out as to what the effect of the 50 per cent income tax rate actually is, but the chancellor [Osborne] remains adamant that it is a temporary measure and does not want to do lasting damage to the UK economy by making it permanent.  Commendable sentiment, but does the chancellor know, or can he actually measure the effects of the tax and has long-term damage already been done?” said Martin Wilson, head of wealth structuring at Signia, the UK-based multi-family office.

“HMRC have been mandated to investigate whether the rate makes sense and whether it has really bolstered the Treasuries coffers, but should these short-term numbers be the measure of the rates success or failure?  The real issue seems to be how do you measure the long-term effects of the 50 per cent income tax rate?  And the government’s fiscal policy as a whole?  Surely the tax revenue gained or lost is a nebulous number with so many other variables involved.

“More focus should be on the much harder to measure migration of entrepreneurs and wealth creators from the UK and the lack of talent deciding to make the UK their home, as this is what will have a major impact on the UK's economy and future tax revenue.  All commentators and analysts would be much better served from understanding the relationship between tax policy and the movement of wealth creators, rather than data on the additional revenue raised by a temporary 50 per cent income tax rate,” Wilson added.