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Think the 50p tax doesn't change behaviour?

Treasury Photo: ITV News

Huge thanks for all the tweets and messages I've had today on whether 50 pence tax does make a difference. Certainly plenty of people have told me it is not at the top of their lists, that other things, particularly the soon to be increased business rates have more of an effect. However, lots of people believe it does have an effect and some firms are changing their behaviour as a result.

One businessman got in touch to explain how his firm has reacted and as a result, he is paying less in both income tax and national insurance than before the tax was brought in. Think the tax hasn't changed behaviour? Not everyone wants to accept that it has, but look at this.

This company has a turnover with about £4 million, and a profit of about £1 million, and it is owned by two directors who both own roughly half of the business. Neither of them are particularly big spenders, but they have looked very seriously at the best way of protecting their income.

Before the 50 percent tax rate came in the two partners were paid around £200,000 a year - broken down into a salary of about £60,000 and a bonus of a £140,000 paid in April each year.

Bank of England Credit: Reuters

Now the 50 per cent rate is in operation the firm has changed the way the two directors are paid. They paid the bonus part of the salary early, in March 2010, not April 2010, to save paying 50 per cent, before the rate came in.

In the last financial year they cut their overall salaries down from £200,000 to £145,000, therefore avoiding the higher tax bracket. They say they have also been approached by a financial adviser who is suggesting other ways of getting cash out of the business at a 32 per cent tax rate.

The directors are very cautious about doing this and they do not want to break the rules or put the company at risk. But the tax rate is making them look seriously at other alternatives, and they did briefly consider moving overseas.

But in terms of the 50p tax policy delivering for the Treasury, in this case it has resulted in two well paid individuals paying less in income tax - the opposite of the desired effect. For every company that is doing this, there may well be a high earner who is paying more tax, who has not changed their financial arrangements, but it is naive to imagine that the rate has not, for some people, actually reduced the amount they are paying.

This is not an enormous multinational with hordes of lawyers or clever tax advisers, but a company built from scratch by two people you have worked very hard build up a firm that employs and exports.

When you have been travelling for work for the last four weekends....sitting in the airport at 5am, knowing the government wants more than half of what you are making is a bit of a disincentive.

– Company director

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