Bonus cuts bring record drop in top taxpayers

Slashed or axed bonuses will see almost a quarter of a million people drop out of the top tax band this year.

Forecasts from Her Majesty's Revenue & Customs suggest that the number of taxpayers on the highest rate will fall by a record 6% this year.

Those paying 40% - the rate that kicks in on annual earnings of £34,800 - will fall from an all-time high of 3.87 million last year to 3.64 million in the current tax year, which ends this weekend. The fall is greater than at the height of the recession of the early Nineties, when top taxpayers fell by 4.7%.

Roy Maugham, a tax accountant at UHY Hacker Young, believes this year's drop is even more dramatic than the statistics suggest.

In last year's Budget, he says, the Chancellor was trying to snare more top taxpayers - 150,000 at HMRC estimates - by cutting the higher-rate band by £1200 from £36,000.

"A sharp decline in higher-rate taxpayers shows just how badly income is being hit by the recession," he said. "A lot of people are taxed at the higher rate by virtue of bonuses - which in the financial services sector have been particularly badly hit.

"Any crackdown on bonuses in the sector by the Government could have a serious impact on middle-income households."

The early 1990s recession saw the tally for higher-rate taxpayers decline to 1.6 million. When New Labour came to power in 1997, this number had risen to 2.1 million and since then - during the years of the "Brown boom" - it has nearly doubled .

"It's quite astonishing for the Government to slash the higher tax band and still be forecasting a fall in those paying tax at that rate," Maugham said. "It shows just how severely discretionary pay is being savaged as many organisations trim wage bills."