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Higher rate income tax to improve government revenues

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Income tax revenue looks set to show a marked improvement this year.

HM Revenue and Customs (HMRC) has predicted that 2010/11 will deliver an additional £10 billion in income tax take.

The majority will come from higher rate taxpayers.

The surge, which will push the income tax stream up to £161 billion, a position it last occupied in 2007/08, should balance the drop in income tax revenue caused by the recession.

As more people rejoin the ranks of the employed, HMRC estimates that in the current financial year the overall number of income tax payers will climb by 400,000 to 30.6 million.

Basic rate taxpayers, however, will register only a moderate 100,000 additional contributors. Those in the 40 per cent band (£37,400 or more annually) and the new 50 per cent bracket (£150,000 or more annually), however, will rise at a disproportionate rate, climbing by 192,000 to 3.4 million.

The freezing of both the personal allowance and the 40 per cent tax threshold – fiscal drag as it is known – will mean that more earners will shift up from the basic tax rate.

Once the graduated repeal of the personal allowance for those on incomes of £100,000 or more is factored in, the boost to government revenue from income tax becomes significant.

In the last tax year, higher rate earners accounted for 56 per cent of the total take (£84 billion). This year that figure is likely to rise to £92.7 billion, the equivalent to two thirds (66 per cent) of income tax revenue.