Andrew Grice: How the Chancellor pulled off the 50p tax cut

George Osborne's judgement was that it was 'now or never' to cut the top rate

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Only a month ago, most Conservative MPs did not believe that George Osborne would dare to cut the 50p top rate of tax. It might be right to scrap the rate introduced by the Brown government in 2010 on the grounds that it was bringing in less than expected. But the politics of a tax cut for the top 1 per cent with incomes over £150,000 a year were lousy.

A relatively small number of Tory right-wingers, including John Redwood, David Ruffley and David Davis, were lobbying for an end to the 50p band but they didn't really expect to win. More than 500 business-owners and entrepreneurs wrote a letter to the Daily Telegraph. The business world also funded an effective "scrap the 50p tax" campaign. But early action still looked unlikely. "We were going through the motions," one Tory MP admitted.

The game changed when Vince Cable suggested in a BBC Radio interview that his party would allow the 50p rate to be cut if the Tories introduced a mansion tax on homes worth more than £2m.

Mr Osborne sensed an opportunity. He believed the top rate, higher than many competitors, deterred entrepreneurs and sent a signal that the UK was anti-business. "His judgement was that it was 'now or never'," one Tory source said yesterday.

His resolve is believed to have been hardened when he received predictions from HM Revenue & Customs on what the 50p rate raised in its first financial year, 2010-11. It is likely to be hundreds of millions rather than the £1.3bn forecast.

The Chancellor's plan was a surprise to the three other members of "the Quad," the Coalition's power group, where the key Budget trade-offs were negotiated – Mr Osborne, David Cameron, Nick Clegg and Danny Alexander. Initially, Mr Osborne looked isolated.

The Chancellor made clear he would like to abolish the top rate entirely – meaning that someone with an income of £150,000 would pay the higher 40p rate which starts to bite on incomes `of about £43,000. Mr Clegg balked – and the Quad agreed that it would be safer to cut the top rate to 45p.

The Liberal Democrats extracted two prices. Number one was "further and faster" progress towards a £10,000 a year personal tax-free allowance. This will rise to £8,105 next month and Mr Osborne is today expected to announce that it will increase to about £9,000 in April next year. Mr Clegg also demanded that the Coalition would raise more from the rich in wealth taxes than the revenue they would lose from lowering the top rate. Mr Cameron vetoed a mansion tax. Eventually, Mr Clegg accepted a package of wealth taxes.

He is well aware that Mr Osborne will have a hard sell. Labour can hardly believe its luck, thinking that the Chancellor is walking into a trap left behind by Gordon Brown. But Mr Osborne is doing so with his eyes open, to set a trap for Labour: will it promise to restore the 50p if it wins the next election? I doubt Labour will answer.

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