People earning £2m more than double share of income tax to 5%

People earning more than £2m a year - a small enough group to fit into the Royal Albert Hall - more than doubled their share of income tax to 5 per cent in the past five years, according to official estimates.

The growing reliance on the wealthy for revenues is set to continue after the election, with top earners facing reduced tax breaks for pensions and - if Labour leads the next government - a potential 5p rise in the top rate of income tax to 50p and a "mansion tax" on expensive property.

The number of taxpayers with incomes over £2m surged to 5,000 between 2010-11 and 2014-15, pushing up revenues from this group from £3.5bn to £8.9bn, according to estimates from HM Revenue & Customs.

The figures show the responsiveness of the wealthy to changes in tax rates: more income was reported when the 50p rate introduced in 2010 was cut by 5p in 2013. They also fuel uncertainty about the impact of future tax rises.

Both the ruling Conservatives and the Labour opposition have promised that "those with the broadest shoulders" will contribute the most to deficit reduction. But the Institute for Fiscal Studies, an independent think-tank, has criticised the parties for giving the impression they can scoop up "apparently free money" from the rich, foreigners and tax avoiders.

Tax payments are already highly concentrated, with about half of income tax revenues coming from just 3 per cent of adults, although the other main taxes - value added tax and national insurance - are much less skewed to high earners.

After the 50p rate was introduced in 2010, the top 1 per cent of adults paid a bigger share of their income in income tax than at any point since 1978, according to data published by the World Top Incomes Database.

It was far below the 83 per cent top rate on earnings - and 98 per cent on unearned income - in the 1970s. But lower thresholds and rapid income growth have meant that income tax paid by the top percentile has risen to more than a quarter of all income tax revenues.

The numbers paying the top rate - broadly equivalent to the top 1 per cent of taxpayers - have increased by a third since 2010, partly as a result of the threshold being fixed in cash terms at £150,000.

This "fiscal drag" is one reason why Labour hopes to raise significant sums by reversing the 5p cut in the top rate of tax enacted by the coalition in 2013 - far more than the £110m estimated cost of the cut.

But there is much uncertainty about the tax take from a higher top rate, underlined by big fluctuations over the past five years in the incomes of the wealthiest. Faced with a rise, they have options to reduce their tax bills by means such as migration, avoidance, early retirement, contributing more to charities and working less hard.

Jolyon Maugham, a barrister who has advised Labour, said a return to the 50p rate was likely to raise billions of pounds for reasons that included "the coalition's success at cracking down on avoidance" and pensions reforms that have sharply reduced the amount of income that can be sheltered from tax.

Tax advisers said there had been relatively little tax planning ahead of the election, indicating the reputational risks of being seen to avoid tax as well as the greatly reduced opportunities for avoidance.

But there are fears that more people will become non-resident, by reducing the number of days they spend in Britain. Mr Maugham said this would be "a most undesirable effect", adding that a "sensible" Treasury would consider counter-measures to deter such moves.

Stephen Herring, head of tax at the Institute of Directors, said it was "a brave assumption" to think that an increase in the top rate would raise any money at all.

Research by the London School of Economics published this month concluded that the impact of restoring the 50p rate was "very unclear". It said a pessimistic evaluation would suggest a fall in tax receipts of £400m, while an optimistic one might see a rise of £2.8bn.

The LSE research showed that the typical individual in the top 1 per cent of taxpayers was likely to be male, aged between 35 and 54, living in London or the southeast and either working in financial services, self-employed or the director of a company.

Top personal income tax rates have risen in several Europe countries since the crisis but the upward trend largely levelled out in 2014.

Reinstating the 50p top rate would put the UK in joint ninth place - up from 18th - in a ranking of OECD countries with the highest combined personal income tax and employee social security contribution rates.

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