Cameron fights it out with Osborne over 50p tax rate

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David Cameron and George Osborne are divided over how quickly the Government should scrap the 50p top rate of tax on earnings above £150,000 a year.

Whitehall insiders say the Prime Minister is worried that a pledge to abolish it would revive the Conservatives' image as a "party of the rich" and could dominate the headlines if announced in the Budget. "He doesn't want one sentence in the Budget to destroy six years of hard work modernising the party," one ally said.

The Chancellor is said to be more convinced than Mr Cameron that reducing the rate – probably to 45p—would help the economy in the long term by making Britain a more attractive place for entrepreneurs. The 50p rate is believed to be raising less revenue than the last Labour Government estimated when it introduced it – £1.3bn in 2010-11 and £3.1bn in 2011-12. One senior Tory backbencher said: "The message has gone out that George Osborne is keener on getting rid of it than David Cameron."

Mr Cameron's caution means Mr Osborne is unlikely to announce the immediate abolition of the 50p rate. But Tory MPs who are campaigning for it to be scrapped hope he will disclose a timetable for it to go.

In negotiations on the Budget, the Liberal Democrats said they were prepared to back abolition of the 50p rate if it was replaced by a wealth tax such as their proposed mansion tax on homes worth more than £2m.

Tory ministers oppose both measures but may bow to Liberal Democrat demands for a cut in tax relief on pension contributions for high earners.

Last night Ed Balls, the shadow Chancellor, confirmed a report in The Independent in January that Labour backs a mansion tax. But he insisted the money raised should be used to help families struggling with higher bills.

He told the BBC: "If the priority, as George Osborne seems to be saying, is that we will use the mansion tax only to help people above £150,000, I say that is out of touch with the struggle families are facing and won't help people get into jobs, which is what we need."

In a report published today, the TUC said the 50p rate should remain. A study by the Institute for Fiscal Studies found that tax and benefit changes will cost households an average of £160 in the financial year starting next month and £370 in future years.

It said families with children and those on lower incomes would feel the biggest impact.