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The U.K. government’s decision to raise the top rate of income tax will leave residents earning more than 1 million pounds ($1.6 million) a year worse off than they would be in any of the world’s other major financial centers.

“People feel let down,” Nick Bacon, a London-based financial services tax partner at accounting firm KPMG, said in a telephone interview. “They thought that the U.K. could always be relied on as being tax-friendly.”

The U.K. government will raise the top rate of income tax to 50 percent in April, making London more expensive for residents earning 1 million pounds a year than New York or Hong Kong, according to KPMG estimates. A London banker on that amount will pay 491,278 pounds in income tax and social security payments from April, three times more than in Hong Kong and 58,500 pounds more than in New York, the data show.

Prime Minister Gordon Brown, facing an election by June, pledged last year to make the finance industry “the servant of people and industry, and not their master” after bailing out banks with more than 1 trillion pounds of taxpayers’ money. London firms such as Tullett Prebon Plc, which acts as a go- between between banks trading securities, and hedge fund operator BlueCrest Capital Management Ltd. said they may move some operations overseas to avoid the tax increases.

The U.K. government will raise the top rate of tax to 50 percent from 40 percent on incomes of more than 150,000 pounds. That will cost anyone earning 1 million pounds a year about 87,588 pounds more in tax, according to KPMG’s estimates.

Righting the ‘Damage’

“I’m sure the seven and half million other Londoners will be overflowing with sympathy,” said Brendan Barber, general secretary of the Trades Union Congress, whose members fund two- thirds of the annual budget of Brown’s Labour Party. “The recession that cost many Londoners their jobs was caused in the finance sector. It is only right that London’s super-rich now make a fair contribution to putting right the damage.”

The rise follows a tax on banks that pay bonuses introduced by Chancellor of the ExchequerAlistair Darling in December. Firms will have to pay a levy of 50 percent on discretionary bonuses of more than 25,000 pounds awarded before April. The levy, which will apply to about 20,000 bankers, will raise about 550 million pounds, according to the Treasury.

“Talent is mobile,” John Varley, chief executive officer of Barclays Plc, the U.K.’s second-biggest bank, told the New Statesman magazine last week. “If the best talent feels compromised by an unlevel playing field, then, yes, it will go. And it will not be good for the economy if talented people conclude they’re better located in Madrid, New York, or Singapore.”

U.K. Most Expensive

The income tax rise will force U.K.-residents earning 1 million pounds to pay more in tax than colleagues in Frankfurt, Hong Kong, Mumbai, New York, Paris, Singapore, Tokyo or Zurich, the KPMG figures showed. The previous year, Londoners would have paid less in tax than all of those cities except for Hong Kong, Singapore or Tokyo.

It will also be the first time since 1989 that the U.K.’s top marginal personal income tax rate will be higher than France and Germany’s, KPMG’s Bacon said.

“The U.K. is an international financial center and those from overseas provide tens of thousands of British jobs and pay billions of pounds in tax,” said British Bankers’ Association Chief Executive Officer Angela Knight on Jan. 8. “The government must not take steps that are detrimental to this business and the U.K. economy.”

Mercer Study

Still, the London’s cost of living relative to other financial centers may offset the effect of the tax rise. The U.K. capital dropped out of the world’s top 10 most expensive cities for expatriates last year for the first time since 2001 as the pound and rental prices dropped, according to Mercer LLC’s Cost of Living Survey, published in July. The study of 143 cities takes into account the prices of more than 200 items, including housing, food, transportation and entertainment.

KPMG’s calculations are based on the assumption that the employee is single, has no children and earns a salary of 1 million pounds a year. Tax and social security payments are calculated from Jan. 1 to Dec. 31, 2010.

As of April 1, 2010
City          Income Tax    Social Security  Total
London        477,519       13,759           491,278
Frankfurt     476,469       10,339           486,808
Paris         350,786       110,342          461,128
Mumbai        338,050       120,000          458,050
New York      414,250       18,520           432,770
Zurich        363,694       54,492           418,186
Tokyo         349,655       12,260           361,915
Singapore     190,366       1,180            191,546
Hong Kong     149,859       940              150,799
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