Osborne considers raising the threshold for top rate of tax

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Indy Politics

The Conservatives are about to focus on tax cuts for 1.6 million earners in Middle England who have been dragged into higher rates of tax since Labour came to power by the failure of Gordon Brown to keep raising thresholds in line with increasing pay.

Teachers, policemen and some nurses have been dragged into the higher tax bracket of 40 per cent on their earnings, leading to dissatisfaction with the Government across the middle classes, according to the Tories. The Chancellor has been able to take an extra £30bn into Treasury coffers over the past decade, but the figures will intensify the backlash against the pre-Budget report which threatens Mr Brown with a revolt and a Commons battle in the new year over taxation.

George Osborne, the shadow Chancellor, has privately commissioned research on the numbers being dragged into the higher rate of tax, at 40 per cent, since Labour came to power. They have been told that the figure of 2.1 million higher-rate tax payers has swollen to 3.7 million this year. The starting point for the higher rate of income tax was raised in the last budget by £1,000 to £34,000 but many people on modest incomes are still caught and the figures are potentially explosive in the growing battle over tax between the two main parties.

The Conservative leader, David Cameron, revived Tory fortunes with the offer to raise the threshold for inheritance tax to £1m which showed that tax could become a potent issue again when Mr Brown finally decides to call the next election. It paved the way for an onslaught on Mr Brown's "on-off" dithering over a snap election and the Tory leader intends to go on to the offensive over taxation next week.

Mr Cameron poured scorn on Mr Brown this week for stealing the Tory proposals for a cut in inheritance tax, which saw the Conservatives overtake Labour in opinion polls. It revived memories of the "tax bombshell" posters used by John Major to win the 1992 general election, but its effectiveness was believed to have been neutralised until now.

Senior Tory sources have revealed that their next "tax bombshell" could be targeted at hundreds of thousands of middle-class earners caught since 1997 by the higher tax band. The Commons research department told Mr Osborne: "In 1996-97 there were 2.1 million higher rate taxpayers. In 2007-08 it is estimated there will be 3.7 million."

Mr Brown is also facing a backlash from unions, as well as the CBI, over the Chancellor's decision to cut capital gains tax from 40p in the pound to 18p and remove "tapers" which brought the tax down to 10p in the pound for those who held their investments for 10 years.

It will mean that many small businesses see their tax rise from 10p to 18p in the pound on long-term investments while private equity companies and second-home owners in search of a quick profit can cash in assets and pay less tax.

The Tory leader is planning to go on to the attack over the CGT changes next week. "We believe we may be able to force Brown into a U-turn," said a Tory leadership source. The GMB general workers' union backed the CBI in condemning the change.

One of the Chancellor's advisers on enterprise, Lord Bilimoria, the founder of Cobra beer, also called for the plan to be dropped.

Unions affiliated to Labour are also calling for an inquest on money wasted by Labour preparing for the aborted snap general election, amid concerns that the party may have to order cuts in the organisation. Sources said that, as well as paying for temporary staff, poster sites had been booked and millions of leaflets printed for marginal constituencies.

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