Tax hikes 'will cause City exodus'

SENIOR City figures today warned of a new "brain drain" that will threaten London's status as the world's leading international financial centre.

They said Alistair Darling's decision to focus tax-raising measures on high earners will push many hedge funds and other firms into abandoning London for alternative bases such as Geneva.

Yesterday the Chancellor announced a new 45 per cent tax band for earnings over £150,000 from April 2011, and also said tax allowances will be reduced for workers on more than £100,000 from April 2010. Jonathan Ivinson, head of tax at law firm Hogan & Hartson, said: "The proposal to raise taxes in the future for high earners to 45 per cent is another stake in the heart of London's once pre-eminent financial services industry.

"We have already seen many successful hedge funds calling time on the UK for Switzerland. This change will only make such emigration more likely. And the exodus may not be confined to hedge funds. It also raises the prospect of a Seventies-style "brain drain" with talented, highly remunerated individuals across industry sectors heading for the exit."

The combination of the higher tax band and reduced allowances will create a bizarre tax anomaly that gives people earning between £100,000 and £106,500 or between £140,000 and £146,500 a marginal tax rate of 50 per cent. This will be one of the highest in the developed world behind only Denmark and Sweden and equal with Japan, according to figures from accountants KPMG.

Andrew Tailby-Faulkes, head of private clients at consultants Ernst & Young, said senior bankers and other City high earners would face swingeing increases in their tax bills. By 2011 people earning £300,000 - even in the current depressed climate not an outlandish figure in the City - will pay an extra £12,000 in tax.

If they are also foreigners taking advantage of Britain's "non-dom" rules their extra annual bill could be as much as £42,000, as Mr Darling has already announced a £30,000-a-year levy for long-term non-doms. "That's not a good sell for the City," said Mr Tailby-Faulkes.

He added: "Switzerland has already capitalised very swiftly and very efficiently on the non-dom changes and I would expect other offshore centres to pick up very quickly on these latest changes."

In his pre-Budget report Mr Darling said that his proposals would affect only the top two per cent of taxpayers, or around 600,000 British workers earning at least £100,000. It is estimated that up to half of them are based in London and the South East.

Colin Stanbridge, chief executive of the London Chamber of Commerce and Industry, said: "Adding a new tax band will disproportionately affect London because we have by far the highest earners in the UK. By increasing the tax burden for successful individuals the Government risks jeopardising the capital's battle to attract the world's top business people. In the longer term, this could hamper the UK economic recovery."

One analysis calculated that the net increase in tax revenues for the Treasury could be negligible because the new band will drive many highly paid workers overseas. Doug McWilliams, chief executive of think-tank the CEBR, said: "It has probably more to do with punishing errant bankers who got us into this mess in the first place than seriously raising extra revenue."

One former Lord Mayor of London said it was up to senior London bankers to act as ambassadors for the City and sell its long-term strengths overseas.

Sir Michael Savory, who was Lord Mayor in 2005, said: "When City bankers go abroad and promote the City as a financial centre it is falling on deaf ears at the moment. We have to say, 'We will see this out and we have got the experience and the expertise to get us out of this'."