Scrapping 40p rate could be 'iconic' Tory pledge, No 10 policy adviser says

Mr Zahawi on Wednesday praised plans by Renewal, a Tory pressure group, to abolish the 40p rate entirely and deliver a tax cut worth £2,000-a-year for 2million middle class workers.

Under the proposals, the move would be funded by lowering threshold for the 45p rate would be from £150,000 to £62,000.

In a speech at Policy Exchange, a think-tank with links to the Conservative Party, Mr Zahawi said: "It is a welcome development that Conservatives have started to seriously debate where next for income tax.

"Labour have the 50p, the Lib Dems have the mansion tax, we need our own iconic tax policy. I think Dave Skelton's [from Renewal's] contribution, and his suggestion that we abolish the 40p rate and pay for it by lowering the 45p rate was a great way of starting the conversation."

One of the Coalition's flagship policies has been raising the tax-free personal allowance, which it says has taken more than 2 million people out of the tax system.

However, the £41,450 threshold for higher rate tax will rise by a flat 1 per cent over the next two years, significantly below the level of inflation.

The below inflation rise means that more than 1 million extra middle-income workers will have been dragged into the 40p tax bracket by next year.

Twenty-five years ago, when the then Nigel Lawson, the former Tory Chancellor, first introduced the 40 per cent band, only one person in 20 paid the higher rate. Today, one in six people pay the 40 per cent rate.

Mr Cameron on Wednesday defended the government's focus on increasing the tax free threshold.

Asked if Tory back-benchers were right to call for the 40p threshold to be raised, Mr Cameron said: "I'm a tax cutting conservative. I want to see us relieve people's tax burden. We've chosen to do that through raising the personal allowance which helps everyone earning under £100,000."

Mr Zahawi said that the cuts are unlikely to be announced in the Budget next week and cautioned against a "knee jerk, panicked reaction".

He said: "I think it's a healthy debate for us to have, although I think it is right that we stick to what the Prime Minister and Chancellor have said, that if there is any money it should go to the lower end of the spectrum."

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