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50p tax rate “may not raise any extra revenue” claims

The Institute for Fiscal Studies (IFS) has found that the 50p tax rate for Britain’s highest earners may not raise any extra revenue for the Treasury and could actually reduce it, according to a report by the Sunday Times, as wealthy Britons either move abroad or take advantage of permissible tax avoidance schemes to escape the rate.

The IFS – the UK’s leading independent authority on tax - is due to reveal its findings about the effectiveness of the 50p tax rate this week, but a leak to the Sunday Times suggests that the report will increase pressure on the Chancellor to scrap the controversial rate.

Paul Johnson, director of the IFS, said: “There are all sorts of ways people can reduce their taxable income, for example by putting money into their pension. Our best estimate is the revenue-maximising rate may be a little less than 50p. A 50p rate could reduce revenue.” The IFS will suggest that 40% is in fact the highest rate that can be introduced without a reduction in overall tax revenues.

The Treasury has already revised downwards its predictions of the amount that could be raised from the 50% rate from £7 billion a year to about £2.4 billion, with some experts suggesting that even this much lower figure is optimistic.

The Coalition is believed to be split on the issue, with Conservatives ideologically opposed but Liberal Democrats more likely to be in favour of higher top rates of tax. Deputy Prime Minister Nick Clegg wants the 50% top rate of tax be retained unless alternative measures, such as a 1% “mansion tax” on homes worth more than £2m, are introduced to ensure the rich contribute a “fair share”.

Chancellor George Osborne has asked HM Revenue & Customs to report on the impact of the 50p rate by next year. If it shows poor tax yields, it could pave the way for an abolition of the rate in 2013.