Chancellor warned over new top rate income tax

The government could fail to raise the amounts of money it anticipates following the Chancellor’s decision to introduce a new 45 per cent top income tax band, it has been claimed.

The move, announced in last year’s pre-Budget report, will see those earning over £150,000 a year paying 45 per cent in income tax as from 2011, with the Treasury forecasting that the change will generate an extra £1.6 billion in the tax take.

However, the Institute for Fiscal Studies (IFS) has argued that the move is unlikely to raise that level of revenue because taxpayers would take action to avoid paying the additional money.

The IFS said that the 350,000 affected by the change would leave the country, put in fewer hours, pay larger sums into their pensions or re-classify income as capital gains in order to reduce their exposure to the new, higher rate.

Research indicated that a 45 per cent tax band would raise only about £550 million after drops in VAT and other indirect tax revenues were factored in, the think tank added.

James Browne, senior research economist at the IFS, said: “Alistair Darling’s income tax increases for the rich will significantly complicate the tax system and may well raise little revenue.

“A simpler and smaller increase in tax rates across a broader range of high-income tax≠payers would raise the money the Treasury is looking for more efficiently, especially if combined with measures to make income tax harder to avoid.”

The Chancellor has insisted that the new 45 per cent tax band, combined with the two-stage removal of personal allowances for those earning more than £100,000, would raise a total of £3.2 billion.

Responding to the IFS claims, the Treasury maintained that the new band would raise the predicted sums and said that the estimates were based on more up-to-date figures than those used by the IFS.

A Treasury spokesman said: “We remain confident in the revenue forecasts set out in the PBR, which included likely behavioural changes. Our estimates are based on detailed work on tax revenues that the IFS would not have had access to.”