I had to read the letter in today’s Telegraph twice after I first saw the headline that referenced it:

50p tax rate is damaging economy and delaying recovery from recession, warn 500 business leaders

The key point I wanted to flag was the implications drawn from the following extract from the letter:

“The tax which is in effect a 58p tax after national insurance is taken into account, puts wealth creators like us in a very awkward position.”

The comment article notes that  the business owners have also provided examples of the damage being done to the economy by the levy.

They say that by taxing their personal income so highly they have less incentive to invest their own cash in their firms or try to make them more successful.

I have never met an entrepreneur who would deny him/herself the opportunity to build up their business to make it more successful. It makes no sense. More successful businesses generate bigger profits when sold. And the owners then pay Capital Gains Tax (at between 10% and 28%) on the profits they make. Not 50% income tax. Or “58p” either.

Most entrepreneurs can decide for themselves whether to draw surplus profits out of their business (typically as dividends). If they do this then these monies are indeed subject to top rates of income tax. BUT the corollary is true too. Higher rates of income tax make it more cost effective to leave money in the company to help it grow. This is the complete opposite of what the entrepreneurs are reported to have said they think the position to be.

The comment also suggests that these entrepreneurs think that they can only invest more money in their business by drawing cash out first, paying 50% tax on it and then reinvesting it. This is clearly a nonsense. Retained profits are not subject to income tax and the business itself pays corporation tax on its profits.

All in all, I conclude that these entrepreneurs clearly need better accountants to help them understand how our tax system works and that making their business more successful faster means paying LESS income tax at 50% – rather than more. In other words, their letter is not well argued.

So my advice today is to check out the list of entrepreneurs who have signed the letter and approach those in your area. It’s likely that they could benefit from your intervention. But I guess they won’t appreciate being told that their argument is misguided – even if we can agree that the 50% top rate is not ideal.