Tax take from the rich to boost government income

The government is likely to see a big rebound in income tax revenue this year, says HM Revenue & Customs (HMRC).

It expects to raise an extra £10bn in income tax in 2010-11, nearly all from 40% and 50% rate taxpayers.

This will largely reverse the past two years' drop caused by the recession, according to HMRC's predictions.

The figures indicate that the 13,000 people earning at least £1m a year will also pay, on average, just over £1m each in income tax.

Ronnie Ludwig of accountants Saffery Champness said the government was likely to generate even more income tax in the coming years.

"If personal allowances and tax bands remain frozen, more people will be dragged into the higher rate bands," he said.

From the point of view of the chancellor - whoever that turns out to be after the election - the Revenue's ability to raise income tax now seems likely to improve.

It predicts that this financial year, the total number of income tax payers will rise by 400,000 to 30.6 million.

There will be a modest 100,000 increase in the number of basic rate payers to 26.4 million, who together will pay an extra £1.2bn, thus handing over a total of £68.1bn.

But the number of people in the 40% higher rate band and new 50% additional rate bracket will jump by 192,000 to 3.412 million.

The 40% higher tax rate is levied on taxable incomes above £37,400 and the 50% rate is now levied on taxable incomes above £150,000 a year.

With both the personal allowance and the 40% tax threshold being frozen this year, more people have drifted up into the basic rate and higher rate tax brackets.

"Fiscal drag really is a chancellor's best friend," says John Whiting, director of tax policy at the Chartered Institute of Taxation (CIOT).

Add in the effect of gradually eroding the personal income tax allowance for people earning more than £100,000 and there is a big increase in the tax take, especially for those at the top end of the scale.

Whereas last year higher-rate payers handed over £84bn in income tax to the Revenue (56% of the total), the combined higher and additional rate payers are predicted to pay a total of £92.7bn this year.

That is £9bn more than last year and will amount to 66% of the government's total income tax stream this year.

Overall, the government's income tax take will rise by an extra £10bn this year to £161bn, almost back to the levels of 2007-08.

The policy of taxing the rich more is highlighted by the fact that anyone earning more than £150,000 will pay 33% of their incomes as income tax this year, while those earning more than a million pounds will pay 44% on average.

In fact, some of those who earn above that level earn so much more - tens of millions of pounds in some cases - that their tax payments bump up the average for that group dramatically.

Last year, the 14,000 people who earned more than £1 million paid an average £828,000 each in income tax.

This year, the 13,000 in that bracket are likely to pay an average of £1.02 million each - 23% more in the space of just one year.

"For all that they individually give a lot, there really aren't enough of them to make a huge difference to our fiscal deficit - to close it, we have to raise money from everyone, not just the rich," Mr Whiting said.

Less than a year ago, the Revenue was gloomy about its ability to raise income tax.

It thought that the number of income tax payers would fall by three million from a peak of 32.3 million in 2007-08 to 29.3 million in 2009-10.

That was because of the recession, rising unemployment and the abolition of the 10% starting rate of tax on the lowest earners, which took some poorer people out of the tax system altogether.

And within that drop, the number of higher rate payers was expected to fall by nearly a million, from 3.89 million to 2.91 million.

In fact, the shrinkage of the tax-paying population has not turned out not to be quite so dramatic.

"Unemployment has not gone up as much as anticipated and there has been inward migration," said Chas Roy-Chowdhury of the Association of Chartered Certified Accountants (ACCA).

HMRC now reckons that in 2009-10 there were 30.2 million income tax payers, nearly a million more than it was originally forecasting.

Within that total, the number of basic rate payers went up by 2.2 million - more than previously predicted - to 26.3 million, while the number of higher rate payers did indeed fall - from 3.87 million to 3.22 million - but not as much as first feared.

The overall effect was that the government's total take from income tax fell from a record £163bn in 2007-08 to an estimated £151bn in 2009-10.

"Tax policy has always been skewed to taxing people more, the more they earn," said Mr Roy-Chowdhury.

"Next year's changes to the taxation of pension contributions may be a tipping point for some people," he added.