Tax experts KPMG says plans to slash the top rate of tax in the UK make it stand out globally as, the worldwide average top rate of tax has been rising.
The global average top personal income tax rate rose 0.3% last year, the accountants report. The UK is out of kilter with plans to cut tax for the wealthiest from 50% to 45% next April.
Bucking the trendThe 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 a global increase in top earner tax has been observed over the past ten years.
"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."
How countries raised taxedThe 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% to 45%. The rate increases are generally deemed as an 'exceptional contribution' which affects individuals reporting incomes of above €250,000.
Maxwell notes: "Further increases may be on the horizon, with President François Hollande planning the introduction of a 75% tax rate band for taxpayers earning over €1,000,000."
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% to 7% depending on the individual's income level. This effectively means that the rate of tax for individuals earning above €300,000 has risen from 45% to 52%.
UK bucks the trendThe 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% to 45% 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% to 52%.
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%.
At 45%, the UK will be closer to the EU average, which, on a purely arithmetical basis, is just over 37% and, if weighted for the different size of populations in the various countries, is 42%, according to KPMG's calculations and Eurostat data.
EU highest rates of personal income tax 2011 ( 2012) and change
- Sweden 56.6% (56.6%) 0.0%
- Denmark 55.4% (55.4%) 0.0%
- Netherlands 52.0% (52.0%) 0.0%
- Spain 45.0% (52.0%) 7.0%
- Austria 50.0% (50.0%) 0.0%
- Belgium 50.0% (50.0%) 0.0%
- United Kingdom (50.0%) 50.0% 0.0%
- Finland 49.2% (49.0%) -0.2%
- Ireland 48.0% (48.0%) 0.0%
- Portugal 46.5% (46.5%) 0.0%
- Germany 45.0% (45.0%) 0.0%
- Greece 45.0% (45.0%) 0.0%
- France 41.0% (45.0%) 4.0%
- Italy 43.0% (43.0%) 0.0%
- Luxembourg 42.0% (41.0%) -1.0%
- Slovenia 41.0% (41.0%) 0.0%
- Malta 35.0% (35.0%) 0.0%
- Cyprus 35.0% (35.0%) 0.0%
- Poland 32.0% (32.0%) 0.0%
- Latvia 25.0% (25.0%) 0.0%
- Estonia 21.0% (21.0%) 0.0%
- Slovakia (19.0%) 19.0% 0.0%
- Hungary 16.0% (16.0%) 0.0%
- Romania 16.0% (16.0%) 0.0%
- Czech Republic 15.0% (15.0%) 0.0%
- Lithuania 15.0% (15.0%) 0.0%
- Bulgaria 10.0% (10.0%) 0.0%
- EU Average 37.0% (37.4%) 0.4%
Marc Burrows, head of international executive services at KPMG in the UK, says: "The 50p rate was always described as temporary and so a firm commitment to its reduction was very welcome to businesses and entrepreneurs.
"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."
Marginal tax ratesHowever the situation is more complex than the headline rates alone might suggest. Burrows continues: "Headline top rates of tax don't tell the whole story. The situation is more complicated than that. For example, here in the UK, whilst the top rate of personal income tax is 50% (reducing to 45%) on earnings of £150,000 or more, some people on lower salaries experience a higher marginal tax rate in certain situations.
"So earnings between £100,000 and £116,210 are taxed at 60% as a result of the clawback of the personal allowance. And from next January the withdrawal of child benefit for claimants with household incomes of £50,000 or more will result in marginal tax rates of more than 50% on earnings between £50,000 and £60,000.
"Similarly, when comparing rates in different countries, it's important to consider the threshold at which the rate kicks in and the effect of social security taxes which may be levied. Indeed the survey shows that when considering the combined effective social security and income tax rate levied on a salary of USD100,000 in a range of different countries, the UK is lower than countries such as Belgium, Italy, Germany and Poland."
Europe a high tax zoneElsewhere in Europe, there is very little change although it remains the region with the highest average top rates of personal tax and contains a number of countries with a top rate in excess of 50%. Western Europe continues to have the highest personal tax rates of any sub-region globally (46.1%).
The average rate for Eastern Europe (16.7%) is still less than half of that of other European sub-regions, largely due to the prevalence of low flat tax initiatives. Poland and the Ukraine are notable for being the only two Eastern European countries of those surveyed to maintain a progressive tax band structure.
In Northern Europe, the average top personal income tax rate is 36.5%. Very little movement was observed in this sub-region during 2012, with the only changes being on the municipal front, as combined rates in Finland, Sweden and Iceland all experienced minor adjustments.
Aside from the changes in Spain, rates in Southern Europe have remained relatively stable at an average of 31.7%. Interestingly, while the world's eyes have been keenly focused on Greece's economy for much of 2012, the country's top rate has remained unchanged at 45% since 2010 when it was increased from 40%.
Rest of the worldThe Middle East and greater Europe region has also seen some movement in tax rates over the past year. In October 2011 (shortly after the publication of last year's survey), Cyprus increased its top marginal income tax rate from 30% to 35%, and applied the change retroactively from 1 January 2011.
In 2012, Armenia also raised its tax rate by 5% and plans to introduce a further 1% increase in 2013. Israel also increased its top marginal tax rate (by three percentage points to 48%) and Georgia, which has not altered its top rate of tax for several years, signalled an intention to decrease its rate from 20 to 18% effective 2013.
Asia was largely quiet on the rate change front, South Korea introduced an additional tax band with a 3% increase in an effort to target high earners as a source of additional revenue. Hong Kong and Singapore continue to offer very attractive personal income tax rates, and rates remained constant in the other Asian heavyweights (China, Japan and India) who have not altered their top rate of tax in the last ten years.
However, there are indications that this trend is set to change with permanent residents of Japan soon becoming subject to a Special Reconstruction Surtax that will start next year with the intention of helping fund the rebuild in the aftermath of the Great East Japan Earthquake.
Aside from the Fijian reforms mentioned above, top rates in the Oceania region remain stable.
Some change has been noted in Africa with Egypt introducing a new 25% tax band to target super high income earners, and Zimbabwe increasing its top tax rate by over 10% (bringing it back in line with 2008 levels).
AmericasTop rates across North America remained relatively unchanged throughout the year, though Canada's most populated province (Ontario) recently announced a hike for high income earners which will increase the top combined federal and provincial rate by 1.56%, putting the jurisdiction onto the list of locations that introduced an additional tax band for its highest earners in 2012.
And while there were no changes to top federal rates in the United States in 2012, the Bush tax cuts are once again scheduled to expire at year's end meaning that, if the expiration remains on schedule, the top US federal tax rate would increase from 35% to 39.6% in 2013.
Overall, Latin America has also kept top rates constant during 2012, though we note that Mexico is scheduled to decrease its top rate from 30% to 29% next year, and a further reduction to 28% is scheduled for 2014. Guatemala is also scheduled to decrease its top rate in 2013.
Highest rates for top earnersThe survey shows that the highest income tax rates in the world are seen in the small Caribbean island of Aruba with a top rate of 58.95%, Other countries with top rates in excess of 50% are largely European: Sweden (56.6% rate), Denmark (55.4% rate), Netherlands (55% rate), Austria (50% rate), Belgium (50% rate) and United Kingdom (50% rate).
There were exceptions to this from Asia and Africa, specifically Japan (50% rate), and new survey participant Senegal (50% rate).
"While these top rates may appear high, it is important to remember that a country's highest personal income tax rate is only one indicator of what taxes individuals may pay on their income," says Maxwell. "Just as influential are which other taxes may apply and on which income thresholds those rates are charged."
KPMG's Individual Income Tax and Social Security Rate Survey is a cross-border survey of personal tax and social security rates with historical data from 2003-2012. The report covers 114 countries, concentrating on the highest level of personal tax payable to the central government.