City solicitors will see a sharp rise in personal taxation after chancellor Alistair Darling today (22 April) announced a new 50% rate of income tax as Labour fights to bring the UK's strained public finances under control.

The new top tax rate, which will apply to earnings in excess of £150,000, will be implemented from April next year, earlier than was initially expected.

The move goes further than an announcement in November 2008 that the top rate of UK income tax would rise from 40% to 45% in April 2011. The move is also likely to spark a renewed debate regarding the impact of taxation on the City's position as a leading finance centre.

Darling also said that personal tax allowances will be withdrawn from those who make £100,000 or more from April next year.

Nabarro London tax partner Jim Mottram commented: "I am not surprised that the Chancellor attacked high earners but I am a little surprised at the triple whammy. The increase in top rate tax, the removal of personal allowances and the reduction of pension relief together may force those high earners that are able to up sticks and leave the country to consider doing so."

Smith & Williamson's Giles Murphy (pictured) said that the stick of higher taxation could lead law firms to consider alternative business structures under which to lower their tax burden.

He commented: "There two key points to look at. First, law firms are increasingly global organizations and lawyers are increasingly mobile meaning they can move into different tax systems as they move offices. The proposed new top rate of income tax can only act as a deterrent for lawyers to stay in the country. Second, there will be a greater desire generally for remuneration to be taken in the form of capital gains and following the implementation of the Legal Services Act, this route will become more feasible for law firms as they take advantage of the new legislation and take in external capital."

Darling said the two measures will see tax revenues rise to £6bn within the next three years. Commercial lawyers will be one of the hardest-hit groups by the tax rise, with the UK legal profession likely to see its annual tax contribution rise by hundreds of millions of pounds.

A City partner earning around £1m would pay well in excess of £50,000 of additional tax a year under the new measures.

However, some City partners denied that this increase will have any significant impact on high-earning lawyers in the UK. CMS Cameron McKenna senior partner Richard Price said: "No-one likes to pay more tax, but we paid 60% in the past. It is only 5% more than what was initially said and I doubt it will make a huge difference to people's lifestyles."

Others stressed that the rate needs to be looked at in the context of how other jurisdictions change their tax rates. In Germany, for example, income above €52,151 (£46,300) is currently taxed at 42% with a special rate of 45% for those earning more than €250,000 (£221,900). In addition everyone pays a further 5.5% solidarity tax on top of this rate. Meanwhile, the French are taxed at 40% on income above €66,679 (£59,200).

The news comes as the Government set out its economy stall for the 2009-10 year amid a deep global recession, in what has been one of the most closely-watched UK budgets of recent years.

Darling said that public borrowing this year would hit £175bn with national debt forecast to peak at 79% of GDP by 2015.

Revising official growth estimates downward, Darling said that the UK economy would contract 3.5% this year, before growing 1.25% in 2010, a more bullish forecast than most independent estimates.

Darling said the provision for losses related to banking bailouts would be in excess of £50bn.

Key points for business from the 2009 Budget Report:

Personal tax

• Top personal tax rate to increase from 40% to 50% for income of £150,000 plus by April 2010
• Income tax personal allowance restricted for those earning £100,000 or more
• Tax relief on pension contributions will be restricted for those who earn more than £150,000 and will taper down from April 2011

Measures for business/investment

• Extra support for loss-making businesses
• Increasing capital allowances for new investment to 40% for one year
• Establishing a £750m strategic investment fund to support advanced industrial
• Package of reforms on the taxation of foreign profits, including the introduction of an exemption for foreign dividends
• Trade Credit Insurance scheme to help UK businesses maintain their finances in the current economic climate
• Insolvency package: consultation to be launched in June on measures to help companies in financial difficulties, with reports to be published on monitoring controversial pre-pack sales

Other measures

• Stamp duty holiday extended for residential properties up to £175,000 until the end of the year
• VAT will increase back to 17.5% from December
• Fuel duty will increase by 2p per litre from September and a further 1p per litre in real terms each year from 2010 to 2013
• Alcohol duty will rise by 2% from midnight tonight
• Tobacco duty will rise by 2% from midnight tonight

Environment

• £1.45bn additional support to the low-carbon sector
• Commitment to cutting emissions by 34% by 2020
• Uplift in support for offshore wind-farm investments that reach financial close over the next two years.
• £405m of funding to support the development of a low-carbon energy and advanced green manufacturing sector in the UK

Legal Week is also launching a Budget reaction board to bring together the profession's reaction to the budget, which will be updated over the next 24 hours.

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Legal Week's Budget Board – the profession's reaction

General reaction:

Michael Wistow (pictured), head of tax, Berwin Leighton Paisner - "This Budget is hardly a recipe for motivating increasingly mobile taxpayers and individuals to greater economic endeavour and reducing the rush of UK companies migrating. Some companies will lose tax reliefs in an arbitrary fashion while Sarbanes-Oxley style legislation will increase. History shows that increasing tax rates rarely achieve their objective of increasing the tax take: individuals will now look to find other ways of earning money or reducing tax liabilities."

Sandy Bhogal, tax partner, Mayer Brown - "My initial reaction to the Budget is not one of surprise. A lot of the measures had been announced previously or were widely speculated on. The focus on tax incentives for green behaviour and the increase in the top rate of income tax seems to be setting the battle ground for the General Election next year. Whilst I suspect this Budget won't be popular in the City, I am not sure it will prompt an immediate migration offshore of skills and capital because people may choose to wait and see what happens next year. On a more technical note, HM Treasury have decided to go ahead and introduce the so called "debt cap" rules for accounting periods beginning next year, which will not be popular with business."

Richard Palmer, head of international tax, Ashurst – "It is clearly a political budget in that with the rise in personal income tax rates we now have a clearer divide in terms of where the parties stand. For business, though, this is not a bad budget. We are pleased to see the taxation of foreign profits coming in and the extended exemption for foreign dividends. Coupled with a commitment to review the taxation of intellectual property, these measures should help stem the flow of companies looking to re-domicile. The only real disappointment is that there was no talk of reducing the headline rate of corporation tax."

David Lewis, tax consultant, Allen & Overy – "The already low level of scrutiny which Parliament usually gives to the Finance Bill is likely to be reduced even further this year given the raft of anti-avoidance and other measures which have been announced and the truncated period of time for debate resulting from the late Budget date."

On personal taxation:

Louise Somerset, (pictured) tax director, RBC Wealth Management – "Raising the top rate of tax to 50% from April 2010 may send out the right political message, but it won't raise much tax. We have already lost a lot of non-domiciled high earners as a result of last year's tax changes, and I worry that London's pre-eminence as a financial centre is at serious risk. The Conservatives have already confirmed that they will adopt the 45% top tax rate proposed last year. It will be interesting to see how far David Cameron is willing to go in taxing very high earners in the face of these latest increases.

"By only reducing tax relief on pensions for those earning over £150,000 from 2011, the Chancellor has reduced the political fallout, but he has also reduced the tax he can expect to raise. I also suspect that the calculations we will have to do will be mind-boggling!

"The removal of personal allowances from very high earners strikes me as a fudge. The extra tax yield, of less than £3,000 per person affected, won't make much difference either to them or to the Treasury, and is going to be complicated to implement. Why is this approach better than a straightforward increase in tax rates, I wonder?"

Simon Yates, tax partner, Travers Smith – "The income tax rises are hugely dangerous for the future of the UK economy. The Chancellor identified the importance of ensuring that the UK financial services sector returns to robust health. With the national insurance rises announced last year, high earners will eventually suffer a total tax rate of 64.8%. We need to ensure that as institutions rebuild globally, they maximise their UK presence: this rate will be a powerful disincentive. Not for the first time, the Government has announced a policy objective but followed it with a tax measure likely to achieve the opposite result."

David Cohen, incentives partner, Norton Rose – "The Chancellor's announcement that the marginal rate of income tax for those earning £150,000 plus will increase to 50% will have a significant impact – both short-term and long-term – on executive remuneration planning.

"In the short term there will be a frantic rush to trigger as many tax liabilities as possible before the 10% increase takes effect. This will apply not just to cash bonuses but also to share options which are taxed when exercised. The rush will bring risks in its wake. The risk for an individual will be that he incurs a tax liability on an unrealised gain and then the shares fall in value. The risk for "the City" and for UK plc is that they are seen to be indulging in the type of short-term practices which are widely regarded as having been a major contributor to the economic crisis.

"Longer term, the gap between 50% income tax and 18% capital gains tax (CGT) will increase employers' motivation to deliver share incentive packages which are subject only to CGT. This is particularly challenging for listed companies especially at a time when their remuneration practices are under such intense and often hostile scrutiny."

Impact on the City and UK law firms:

Neil Warriner, head of tax, Herbert Smith – "Overall I am not sure that this package of measures will deliver any material changes. Although most lawyers at the top City firms will not like the top rate of tax increasing to 50% from 2010, most will not be surprised that this has happened [and] I doubt whether businesses will relocate as a result of this move."

Richard Price (pictured), senior partner, CMS Cameron McKenna – "No one likes to pay more tax but we paid 60% in the past. It is only 5% more than what was initially said and I doubt it will make a huge difference for people's life-styles."

Rupert Ticehurst, private client partner and head of private wealth and charities, Herbert Smith – "The top rate of tax rising to 50% will have an impact. Lawyers could decide to leave and conduct the same type of work but in a different jurisdiction. They could also decide that, with the 50% rate of tax and national insurance on top of that, to work less and get paid less as they may question the point of working long hours with a diminishing return, – a mood reminiscent of the 70s."

On the Enterprise Investment Scheme:

David Brookes, tax partner, BDO Stoy Hayward – "While these changes are welcome, they don't go nearly far enough. The Chancellor has ignored justifiable calls to raise income tax relief on EIS investment to 40%, and relax the rules for investee companies, and in doing so, has missed a vital opportunity to help small businesses raise increasingly scarce equity finance to get them through the recession and create jobs."

On VAT:

Marc Welby, VAT partner, BDO Stoy Hayward – "By not increasing the rate of VAT beyond the anticipated return to the 17.5% rate to 19.5%, the Chancellor has missed his opportunity to raise an additional £10bn per annum in tax revenues to reduce the budget deficit.

"The Chancellor's inaction on VAT has come as something of a surprise – the political and economic climate has perhaps never been better for the bitter pill of a VAT increase to be swallowed. Furthermore, that pill could have been sweetened by a reduction in corporation tax to 25% – this would have helped the UK in its bid to remain tax competitive and still have left the Chancellor with a net £6bn per annum to help reduce the historic budget deficit."

Lovells tax partner Greg Sinfield – "The VAT measures included in the Budget contain no surprises. Such changes as there are have been either announced beforehand or widely expected. The thresholds for registration and de-registration have increased slightly to £68.000 and £66,000 respectively. More significantly, a new simpler procedure for opting to tax property will be introduced. This change should allow land owners who have made exempt supplies to opt to tax future supplies of land or buildings more easily from 1 May 2009.

"There will be further legislation in relation to the change in rate from 15% to 17.5% at the end of this year. In particular, anti-forestalling legislation already released in draft will be in the Finance Bill. The legislation is aimed at businesses which cannot fully recover VAT and will prevent them manipulating the time of supply rules to pay VAT at 15% on supplies which should properly be regarded as liable to VAT at 17.5% because they occur on or after 1 January 2010.

"The biggest change of all (and also the one that was most predictable) is the introduction of legislation to implement the VAT Package. This changes the rules on the place of supply of services supplied between businesses in different countries. There will also be related changes to the time of supply rules, obligations to submit European Sales Lists (which affect services for the first time) and a new refund procedure for Eighth Directive refund claims."

Impact on AIM:

Tim Stocks, partner and head of financial institutions and markets, Taylor Wessing – "The Chancellor has today dealt a hammer blow to the AIM market, once a jewel in London's crown as financial capital of the world. Mr Darling has failed to respond to lobbying from the London Stock Exchange and the broader investment community to allow Venture Capital Trusts (VCTs) to invest in secondary issues. He has also not increased the tax-free investable amount, or increased tax relief on such schemes to 40% as many had called for. This is a severe blow to both investors and companies listed on the exchange.

"The Chancellor has today missed this golden opportunity to reinvigorate trading and increase liquidity on AIM. However, he has left the door open for future moves, suggesting that further announcements could be made in the 2009 Finance Bill, meaning that all is not yet lost."

On capital allowances:

Miles Walton, (pictured) tax partner, Allen & Overy – "The increase in the main rate of capital allowances from 20% to 40% sounds like good news. But this is only of use for a business which is paying tax. Not many are at the moment so this will achieve little in the short term. The usual exclusion for leased assets is not too relevant, as few banks have taxable profits either. What is really needed is a new system which gives capital allowances to those who are making taxable profits and who are prepared to invest, backed by a Government guarantee, in assets used by industry."

On pensions:

Michael Wistow, head of tax, Berwin Leighton Paisner – "Pension arrangements were overhauled in a major fashion just three years ago so these new changes are yet another example of the lack of certainty in the UK's tax code which damages the country's international standing."

On regulation and tax collection:

Michael Wistow, head of tax at Berwin Leighton Paisner – "We have reservations about the potential implications of [Budget Note 62 'Accountability of Senior Accounting Officers'] this; with real concerns it could, however unintentionally, create a back-door Sarbanes-Oxley act for business.

"While it is intended to ensure companies pay an extra £140m of tax in the next four years, in reality it is likely to cause tax to distort commercial decisions. This is an extraordinary retrograde step which shows little sign of learning the lessons of Sarbanes-Oxley."

Matthew Hodkin, tax partner, Norton Rose – "One of the easily missed features of the voluminous documentation released with the Budget's press releases is the increasing pressure which HM Revenue & Customs is seeking to put on the professions to help them collect tax.

"Particular measures include requiring senior accounting officers of large companies to take personal responsibility for the accounting systems used to calculate the company's tax bill, with those officers being on the hook for penalties in the event of a careless or deliberate failure of those systems.

"HMRC have also announced a consultation on how tax agents (which will include tax lawyers) can "assist" them with the collection of tax, alongside a consultation to increase the scope of the tax avoidance disclosure provisions.

"These measures will increase the burdens and risks on tax professionals and their clients alike, and are symptomatic of HMRC's increasing tendency to micro-manage the way in which they obtain information about transactions undertaken by taxpayers. This approach is unlikely to produce sympathy among those who are merely trying their best to understand what is already a highly complex tax system."

Click here to read Macfarlanes' Budget Briefing.

Click here for Allen & Overy's response to the budget.

Click here to read the budget coverage from Legal Week sister title Accountancy Age.

Click here to visit HM Treasury's Budget microsite.