Number of top-rate taxpayers 'to reach four million

The number of people paying the highest rate of income tax will reach four million within five years, a leading thinktank predicted today.

The Institute for Fiscal Studies' forecast sees the number of people paying the 40% top rate rising from its current level of 3.3 million to almost double the 2.1 million who paid the maximum level of income tax when Labour came to power in 1997.

The IFS figures were based on the chancellor's pre-budget report of last week, which assumed that tax allowances and thresholds would rise in line with inflation. IFS director Robert Chote told BBC Radio 4's Today programme: "Typically, average earnings increase by more than inflation. That means that over time, a higher proportion of people's earnings tend to fall into the higher rate brackets."

The phenomenon, known as "fiscal drag", allows Mr Brown to increase the overall tax take without politically difficult hikes in tax rates.

"If you were to make a reasonable assumption that earnings were to rise by 2% a year on top of inflation, which is slightly less than the trend rate in the economy, then we estimate that you would see the point at which people start to pay the higher rate fall from 43% above average earnings to 29% above average earnings over the next five years," said Mr Chote.

"The implication of that is that the number of higher-rate taxpayers rises."

Mr Brown could keep the proportion of taxpayers in the top rate down by increasing the threshold - currently about ?35,000 - by more than inflation in future budgets, said Mr Chote.

"It [the proportion of taxpayers in the top band] has risen since Labour came in from about 2.1 million to 3.3 million, so it has been an increasing number, but it is still a relatively small proportion of people as a whole that are paying higher-rate tax," he added.