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16 March 2012updated 22 Oct 2020 3:55pm

Chart of the day: the top rate of tax

For nine years of Thatcher's premiership, the top rate was 60 per cent.

By George Eaton

A

Graphic by Henrik Pettersson.

With the news that George Osborne is actively considering whether to reduce the 50p tax rate to 40p, here’s how the top rate of tax has changed over the last forty years.

In 1973, the top rate stood at 75 per cent before Labour’s Denis Healey raised it to 83 per cent in his first Budget. A surtax of 15 per cent on “investment income” meant a de facto marginal rate of 98 per cent.

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Following the Tories’ election in 1979, Geoffrey Howe slashed the top rate to 60 per cent. He declared in his Budget statement:

It is universally recognised, or almost universally recognised, that the present top rate of 83 per cent. on earned income is an absurdity. The rate of 98 per cent. on investment income is even worse. Such rates bring in very little revenue. But they kill incentive and are patently unjust. Some members of the previous Government recognised this, but they did nothing about it. I now propose an overdue measure of reform. The top rate on earned income will be cut from the present 83 per cent. to 60 per cent.

Howe noted that the top rate remained above that of the US, where it was “only 50 per cent”, a sign of how the parameters of debate have narrowed since.

The top rate then remained at 60 per cent for the next nine years until Nigel Lawson’s infamous 1988 Budget when it was reduced to just 40 per cent [prompting cries of “shame” from the opposition benches]. So disruptive were the protests from Labour MPs that the sitting was suspended for ten minutes.

It took 21 years and a record deficit of £175bn before the top rate was raised again by a British Chancellor. In his 2009 Budget, Alistair Darling abandoned Labour’s manifesto pledge to freeze income tax and increased the top rate to 50 per cent. In addition, he announced that the personal allowance would be gradually withdrawn from those earning more than £100,000 [at a rate of £1 for every £2], a brilliant act of stealth redistribution that Osborne is yet to challenge.