UK: Downward Trend In Top Personal Tax Rates About To Reverse

The global decline in top personal income tax rates over the past seven years may be about to reverse, according to a survey by KPMG International.

KPMG’s 2009 Individual Income Tax and Social Security Rate Survey shows that the top average personal income tax rate dropped 0.3% worldwide in 2009 to 28.9%, from 29.2% in 2008. However, KPMG anticipates that this trend will reverse due to the need for new sources of budgetary and stimulus funding among governments.

The UK was among the first of the new trendsetters, adding a new 50% top rate for those earning GBP150,000 a year or more from next April. Other countries are also making plans to implement personal income tax rate increases for top earners, with still more examining this option, says KPMG.

“In the current economic environment where countries face increasing budget deficits and need funding for various economic stimulus packages, it is becoming clear that some are turning to those in the highest income brackets amongst their current tax bases to increase revenue,” said Sue Bonney, head of tax at KPMG Europe LLP.

“Our study has recorded a general decline in top personal income rates over the past seven years, but in 2010 we are seeing indications that a reversal may be on the way, as there is speculation around increasing the top rates in the US and a few countries in the European Union – here in the UK and also in Ireland, specifically – are already proposing rate increases for its top earners,” she added.

According to the KPMG study, the highest personal income taxes in the world are still paid by the citizens of the European Union (EU). But with the introduction of flat-rate taxes in a number of Eastern European countries – including Latvia and Poland, which reduced their top rates to 23% and 32% respectively for 2009 – average rates have fallen from 41.1% in 2003 to 36% in 2009.

However, Bonney warned that raising the top rate of personal tax could make it hard to attract top-end talent to some countries which could impact on their growth prospects.

“High income earners typically have the talent and credentials to migrate to countries that have lower personal income tax rates and a need for skilled labor, so a shift in personal income tax rates could potentially impact global workforce mobility trends and starve some countries of so-called mobile talent.”

Tax is a significant issue for the employer as well, says Bonney. “As HR professionals are being asked to re-evaluate the costs associated with international assignment programs, income tax rates become an important consideration when deciding where to send an assignee,” she observed. “Assignees also need to be aware of how various taxes will impact their income both at home and in-country.”

Denmark has the highest personal income tax rate at 62.3% (a figure which includes social security tax). In the Asia-Pacific region, Japan has the top rate at 50%. Chile has the highest rate in the Latin American region at 40%.

KPMG’s 2009 survey also includes an analysis of social security rates, specifically examining income tax and social security rates for gross incomes of employees earning USD100,000 and USD300,000. Social security components can vary significantly by country, employer, and employee type.

When taking both the personal income tax rate and social security rates into account for employees earning USD100,000, the countries with the highest rates were Slovenia (54.9%), Croatia (53.5%), and Hungary (48.1%).

For employees earning USD300,000, the countries with the highest rates were Slovenia (60.4%), Denmark (57.1%), and Croatia (54.5%).

“Social security is often a forgotten tax and many countries are talking about increasing contributions made to these programs,” added Bonney. “HR professionals need to consider social security along with the entire gamut of taxes – national, state, municipal, etc. – in order to better inform their international assignment program decisions and discussions.”

The study also reviewed contribution requirements (for both employer and employee) for employees earning gross income of USD100,000 and USD300,000. France had the highest combined rate at approximately 60% under either scenario, followed by Belgium at 47%, and then Hungary and Italy both in the lower 40% range.