'Taxing the rich won't help'

The Government's plans to raise income taxes on the rich, likely to be confirmed in the Budget, are "very unlikely to raise the revenue that it has predicted" – and may even lose it money.

Researchers from the independent Institute for Fiscal Studies estimate the new 45p rate of income tax for those earning £150,000 or more may lose the Exchequer as much as £800m a year, on the most pessimistic assumptions about the numbers of taxpayers earning those sums, and their ability to reduce their taxable income. Traditional methods to minimise tax bills include increasing pension contributions, which qualify for tax relief, and maximising other tax breaks. The report also points to the possibility that the 2 per cent of us who do earn £100,000, will work less hard, migrate or retire early.

"The most the Treasury could expect to raise by increasing the marginal tax rate on incomes above £150,000 would be £900m" says the Institute. The Treasury thinks the move will raise £1.6bn, to help plug an estimated fiscal deficit of £160bn and £180bn next year.

The 45p rate will come into effect in April 2011. The IFS suggests raising the higher rate from 40p to 43p in the £ would more reliably achieve the required £1.6bn.