A proposed rise in the top rate of income tax on

UK citizens earning £150,000 ($227,527) or more to 45 per cent will boost business for the tax-planning market if the change becomes law in 2011, financial advisors said.

Meanwhile, the government also announced it intends to review its relations with offshore financial centres, notably the Isle of Man and the
Channel Islands, following recent controversy about whether savers in funds domiciled there can receive public aid in the event of financial failures. The UK government did not spell out what direction the review would take.

In his Pre-Budget Report, Alistair Darling, the

UK finance minister, proposed to create a new, 45 per cent tax band on people earning £150,000 or more, moving from the current 40 per cent band. When rises in national insurance contributions are added in, this means people in the top band will pay 46.5 per cent tax.

The government is also restricting the value of personal tax allowances on people earning £100,000 or more, adding further to tax bills. Mr Darling also proposed to temporarily cut value added tax to 15 per cent until 31 December 2009 from its present 17.5 per cent rate.

Mr Darling said that if the

UK economy showed clear signs of revival by 2011, the proposed tax hike on high earners may be axed. The next general election must take place by May, 2010, so the proposed increase in the top rate of tax may not go ahead anyway and it is likely to prove a hot political issue. Advisors said the tax hike would raise relatively little revenue in relation to the potentially harmful impact. 

Such a tax hike should prove a boon to the tax-planning industry as individuals look at tax-advantaged vehicles such as venture capital trusts and pension schemes to mitigate the impact of the tax, said Malcolm Cuthbert, managing director of financial planning division at UK stockbroker Killik & Co.

“From our point of view as tax planners, this is manna from heaven because it will encourage contributions into pensions and other vehicles,” he said.

“I know that some [of his clients] will think now about moving abroad. Some people have said that if it [income tax] goes up to 46, or 47 per cent or more, they are off. I don’t know how many people will leave, but more will leave the
UK and not come to the

UK to launch a business,” Mr Cuthbert said.

“They [expats] will look at safe havens like
Switzerland, Hong Kong and

Singapore as they are well out of the reach of the EU,” he added.

Sophie Dworetzsky, partner at solicitors Withers, said: “A series of short term and welcome fiscal stimulus measures, such as announcing a reduction in the rate of VAT from 17.5 per cent to 15 per cent effective 1 December this year to 1 January 2009, were diminished by the downside of increases in income tax and national insurance contributions.”

She said the increase in tax will also affect non-domiciled residents in the

UK who must already pay a new, annual £30,000 tax.

"The new proposal for income tax increases for those earning over £150,000 may set alarm bells going at the thought of what is still to come in the future," said Cliff Husband, head of research, AWD Chase de Vere, the financial advisory and wealth management firm. 

"Pension planning should be given serious consideration to lessen the impact of any tax increases and for those willing to take the risk, there are always VCT and EIS investments offering 20 per cent and 30 per cent income tax relief respectively," Mr Husband said, referring to venture capital trusts and enterprise investment schemes, which enjoy substantial tax reliefs on long-term investments.

Tim Gregory, partner at the private wealth team at accountants Safferey Champness, said the income tax increases could encourage people to quit the UK: "Such a package was only to be expected, but the overall cost of these measures remains to be seen. It may well be the last straw for people who have been on the cusp of relocating away from the UK after last year’s tax changes."

Patricia Mock, private clients services director at accountants Deloitte, said changes to income tax allowances will hit affluent and wealthy citizens hard.

"Most surprising of all was the news that from April 2010 people earning between £100,000-£140,000 per annum will lose part of the benefit of the income tax personal allowance, an allowance previously enshrined as sacrosanct for all taxpayers," she said.

Ms Mock continued: "649,000 people fell into that bracket in 2008-09. The Chancellor announced that such earners will only receive the same net benefit from their personal allowance as basic rate taxpayers – which will take around £100 per month out of their pockets. And it’s worse news for people earning more than £140,000 per annum will get no personal allowance at all – at a cost to them of £200 per month."

Responding to Mr Darling’s intention to review the
UK’s relations with offshore financial centres, the Isle of Man, Jersey and
Guernsey cautiously welcomed the announcement, saying it would create an opportunity to clarify their positions.

“The announcement of this review across the three Crown Dependencies and 14 Overseas Territories is understandable in terms of the turbulent economic climate being experienced around the globe,” Isle of Man chief minister Tony Brown said in a statement. “As far as the Isle of Man Government is concerned we welcome this exercise as another opportunity to show that the
Island is well regulated, financially stable and internationally responsible,” Mr Brown said.

In Guernsey, Lyndon Trott, chief minister, said the jurisdiction would co-operate closely with the

UK review and added that groups such as the Organisation for Economic Co-Operation and Development noted that financial services in the island were well regulated and transparent.

In Jersey, chief minister, senator
Frank Walker, said: "We welcome this review, and we understand the Chancellor's desire to undertake it against the backdrop of turbulent economic conditions across the globe, which were the subject of the recent G20 summit in

Washington.

"The review will give us a further opportunity to show the strength of 
Jersey's regulatory system and the extent of our international co-operation and transparency. We are confident it will also provide us with further third party endorsement of our continuing compliance with international standards, of our preparedness to cope with the present economic climate and withstand future shocks, and also of our ability to sustain the long term stability of our economy.”

Withers, the law firm, said the government's proposed review contained a veiled threat.

"Hidden under the headlines of this crisis management Pre-Budget Report is a more worrying promise to review the fiscal status of the UK’s various Overseas Dependencies (such as Jersey, Guernsey, Isle of Man and Bermuda). Residents of these dependencies will be increasingly concerned about the Government’s apparent continued desire to place their economies at risk by jeopardising their principal source of revenue – financial services," said Christopher Groves, partner at the law firm.