City's top earners hunt for ways round higher tax rates

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There were immediate predictions that share schemes in which high earners get paid in their employers' stock will come back into fashion to reduce their tax liabilities to less than 20%.

In an effort to claw back the huge set of giveaways in yesterday's Pre-Budget Report, the Chancellor said he would introduce a new higher rate on income tax. "Those with the highest incomes have seen their earnings almost double since 1996," Alistair Darling said.

"From April 2011 I intend only on income over £150,000 to introduce a new rate of income tax of 45%." He added: "This higher rate of tax will only effect the top 1% of incomes."

That new higher rate will however add up to a take from the Treasury of 59.8% for such earners when adding in employees' national insurance contributions of 1.3% and 13.3% on employers' NICs.

"Higher earners will look for ways to receive rewards which will not be taxed to the higher-rate of income tax," said Grant Thornton tax expert Cormac Marum.

Accountants are likely to look at schemes such as payment by shares. In such schemes high earners get their income by triggering a capital gain on the sale of the shares so that those earnings are taxed as a capital gain at a rate of 18%.

The Institute of Directors damned the new 45% rate. "A 45% income tax rate will affect few and raise little," said a spokesman. "Anything that potentially harms our competitiveness is a danger.

"The first sector of the economy to be dismayed at this proposal will be the City of London, which is already under pressure from foreign financial centres."

Deloitte expert Patricia Mock said loss of income tax allowances will also hit earners over £100,000 a year.

"By 2011 we'll have six different income tax rates to juggle with plus tapering allowances. That's quite an increase in complexity for anyone who operates a payroll," she said.