Top earners to pay new 45% income tax rate

The Chancellor was said to be unveiling the plan for a 45% top rate on people earning at least £150,000 a year in his Pre-Budget Report this afternoon.

But the new tax band would not be introduced until after the next general election, which must be called by May 2010 at the latest.

It is thought to be among a series of deferred tax increases designed to bring down borrowing incurred now to fight the recession.

The PBR is expected to see Value Added Tax cut from 17.5% to 15% as part of a £15 to £20 billion "fiscal stimulus" to encourage spending and spur economic growth.

The plans will send borrowing soaring above £100bn, leading to Conservative accusations that Labour is storing up a "tax bombshell" in a reprise of the Tories' 1992 election campaign.

The Treasury refused to comment on the apparent leak of the 45% tax rate to the BBC, The Sun and The Times, describing it as "speculation".

But ministers repeatedly stressed at the weekend that Mr Darling would set out in the PBR how he intended to get the public finances on a more stable footing later on.

In a speech to the CBI's annual conference this morning, Prime Minister Gordon Brown will say: "To act now means we have also a duty to set out what we will do later."

A new top rate of tax would create a widening divide between Labour and the Tories on fiscal policy.

Conservative leader David Cameron announced last week he would no longer match Government spending plans from 2010/11 and has set his face against today's unfunded spending increases.

Labour has been committed since 1997 to no increases in income tax, including for the duration of this Parliament.

The deferral of any increases in income tax until after the next election will mean that they will not be introduced unless they are endorsed by voters.

The strategy will only fuel speculation that Labour is plotting a course to a fourth consecutive election victory. Mr Brown insisted yesterday he was making no plans to go to the country next year.

The current top rate of tax is 40 pence in the pound, and is levied on earnings of more than £39,825 a year. It covers about 4 million people.

Commentators said the 45% rate alone would make minimal inroads into Britain's ballooning debt, raising £2bn or 3bn a year.

Robert Chote, director of the Institute of Fiscal Studies, estimated that it would be paid by about 400,000 people.

"You are not going to raise an enormous amount of revenue from this," he said.

Liberal Democrat Treasury spokesman Vince Cable said the Government had finally realised the tax system was "unfair", but added: "By itself an increased tax rate on those earning over £150,000 would only raise negligible amounts of additional revenue."

Matthew Elliott, chief executive of the TaxPayers' Alliance, said it would be a "totally backwards" step.

"The Government's strategy risks hobbling the economy even further and scaring off potential investors."

The Prime Minister yesterday dismissed suggestions the Government's strategy was a gamble with the public finances, which could see the country end up saddled with higher debt.

As well as the VAT change - a temporary measure expected to last about a year - the PBR is expected to include further tax cuts targeted at the least well off.

Other options include postponing the introduction of increased vehicle excise duty for older vehicles and taxpayer-funded guarantees on loans to small businesses.

There are also suggestions of a new three month grace period for mortgage holders struggling to keep up with their repayments before repossession proceedings kick in.

Further efficiency savings in the public sector will be announced, allowing some expenditure to be used more constructively to fight the recession.

Mr Brown will today attack Mr Cameron's opposition to the fiscal intervention as a "failure of leadership", adding that inaction would make matters worse.

"The best way to keep taxes low in the long-term is for us to ensure that the downturn is as limited in length and scope as possible, and that means help when help is needed, not when it is too late," the Prime Minister will tell business leaders.

"A boost to the economy to sustain growth that will help to keep businesses open and protect people's jobs and homes.

"But to act now means we have also a duty to set out what we will do later.

"By showing we will take the necessary decisions in the medium term to guarantee stability we can act today in a strong and decisive way."

The Prime Minister indicated yesterday there would be "further measures" to encourage banks to improve lending to small businesses and the provision of mortgages.

There are also suggestions of a new three month grace period for mortgage holders struggling to keep up with their repayments before repossession proceedings kick in.

And he said the Government was looking at further public investment to help the construction industry.

The Conservatives claimed borrowing could top £100 billion next year, with future debt wiping out any immediate gains.

"I do have a real concern about a Government going on a borrowing binge that even they are now admitting is going to lead to much higher taxes later," he said.