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Recession to cull numbers of top rate taxpayers

The economic downturn looks set to reduce dramatically the proportion of people who pay income tax at the 40 per cent rate.

Figures from HM Revenue and Customs (HMRC) have revealed that those expected to fall into the 40p tax bracket will decline from 3.89 million in 2007/08 to just 2.9 million in 2009/10, a fall of over a million.

The level of tax take from higher earners is also predicted to drop, down by £15.9 billion from £91 billion to £75.1 billion.

The threshold for those paying 40 per cent in income tax has been raised for the present tax year from £34,800 of taxable income to £37,400, a move that will cut the proportion of taxpayers in the higher band.

However, the increase in the earnings threshold by itself does not account for the drastic drop in the estimated tax take.

The recession and the credit crunch have been scything both earnings and jobs, particularly in the financial services sector.

If the forecasts are accurate, the public purse could be badly hit. Figures suggest that the government is reliant on the tax returns generated by higher bracket taxpayers.

In 2008/09, the 40 per cent tax band represented 40 per cent of income tax paid, delivering £59.5 billion in addition to the basic rate that was also contributed by higher earners.

Even though the 40p rate will only generate £53.6 billion this year, that still amounts to 39 per cent of the total income tax take.

HMRC has calculated that the overall number of people paying income tax will drop from 32.3 million in 2007/08 to 30.9 million in 2008/09 and to 29.3 million for 2009/10.

Basic rate tax payers will rise from 23.8 million to 25.4 million during this period, although the amount of tax they will produce is expected to fall from £67.2 billion in 2007-08 to £65.1 billion this year.