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Tories plan an end to 50p rate of income tax

David Cameron and George Osborne are discussing plans to cut the 50p rate of income tax after being told that it is generating only marginal returns for the Exchequer.

Government sources said that both men are intent on cutting the top rate of tax, for those earning more than £150,000 a year, to 45% - possibly as soon as in the Budget next April. Senior Liberal Democrats say they would not necessarily oppose the cut - provided any income tax cuts for the richest are offset by other measures which target them.

The Conservative plan - which will prove controversial at a time of severe cuts to public-sector jobs and services - is being driven by Treasury analysis suggesting that the extra revenue generated between the 45p and 50p tax bands could be as little as £750m.

The Prime Minister and Chancellor believe that the 50p tax band is sending out a damaging message to "wealth generators", particularly from abroad, whose investment and spending power is vital for the economic recovery.

But the Liberal Democrats fear that reducing the top tax rate will be unpopular with the party's core voters who will see it as giving "tax breaks to fat cats". They are determined to wring out concessions from Mr Osborne in return for not opposing a move that would be popular with Conservative grassroots supporters.

Senior Conservatives are privately pushing Mr Osborne to go further and reduce taxes back to 40% - at the rate they were before being raised by Labour in 2009.

Treasury projections suggest that up to 70% of the expected £2.4bn revenue generated from the 50p rates would still be collected at the 45p rate. This is because, at 50p, the incentive increases to retire earlier, emigrate, contribute more to a pension or invest in tax avoidance schemes.

The Treasury is still waiting for the details of an assessment by HM Revenue and Customs into the amount actually raised in the first year to April 2011.

Taxpayers have until January to file their returns and a decision on what to do about the 50p rate will be finally taken when that information has come in.

One senior Conservative source said: "The decision is not about whether to do it, it's about when."

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