The recession is expected to shrink the number of higher rate taxpayers by a million in just two years, according to figures from HM Revenue & Customs.
HMRC statistics show that the tax authorities expect the number of higher rate payers to shrink from 3.89 million in 2007-08 to 2.9 million in 2009-10.
The amount of income tax they pay is also predicted to shrink by £15.9bn in that time, from £91bn to £75.1bn.
Higher rate payers are currently taxed at 40% on taxable income above £37,400.
"These projections show how significant a contribution higher rate taxpayers make to the Exchequer - and how important it is to keep them contributing," said John Whiting of the big accountancy firm PwC.
Fiscal drag in reverse
The threshold for paying the 40% tax rate was pushed up again this year, from £34,800 of taxable income to £37,400.
 |  The halving in the number of millionaires suggests a fall in tax revenues of seismic proportions in the coming years  Ronnie Ludwig, Saffery Champness |
On its own, that move would have reduced the total number of higher rate payers, as more people saw their entire incomes pushed back into the basic rate tax bracket.
But the dramatic shrinkage in the number of top rate taxpayers from their peak two years ago reflects the effects of the recession.
In particular, it shows the effect that the credit crunch and banking crisis have had on the incomes of highly paid individuals working in financial services.
"If a lot of the higher rate taxpayers in financial services are not getting bonuses, this prediction is not entirely unrealistic," said James Browne, a senior research economist at the Institute for Fiscal Studies (IFS).
Predictions
In this year's Budget the government noted that income tax and national insurance receipts for 2008-09 were likely to show a shortfall of £5.3bn, bringing in a total of £243.2bn, of which £147bn is income tax.
| BASIC RATE TAXPAYERS 07-08: 23.8m - £67.2bn paid 08-09: 25.8m - £64.9bn paid 09-10: 25.4m - £65.1bn paid Source: HMRC estimates |
And the chancellor forecast a further fall of 5% this current financial year to £232bn.
"Labour income is expected to fall in 2009-10 due to the weakness in the labour market. The forecast also allows for a further drop in receipts from the financial sector in 2009-10," said the Budget report.
However the Revenue's more recent figures illustrate the extent to which the government has become particularly dependent on the wealthiest taxpayers to generate its income tax revenues - and the extent to which that tax-take is vulnerable to the downturn.
That is because higher rate taxpayers pay more income tax, as a group, than the far more numerous basic rate payers.
How many?
HMRC estimates that the total number of people paying income tax will have fallen from 32.3 million in 2007-08, to 30.9 million in 2008-09, and then to 29.3 million this tax year.
| HIGHER RATE TAXPAYERS 07-08: 3.89m - £91bn paid 08-09: 3.56m - £83.9bn paid 09-10: 2.91m - £75.1bn paid Source: HMRC estimates |
While the number of basic rate tax payers will have risen from 23.8 million to 25.4 million during that time, the number of higher rate payers will have dropped sharply, from 3.89 million to 2.91 million.
The amount of income tax paid by the basic rate payers is expected to drop from £67.2bn in 2007-08 to £65.1bn this year.
However it is a different story for the 40% taxpayers.
The amount they pay will have plummeted over that time, dropping by 17% to £75.1bn.
So this year 25.4 million basic rate payers are expected to contribute £65.1bn, while just 2.91 million higher rate payers will pay £75.1bn.
Targeting the rich
The existence of the 40% tax rate makes a huge contribution to the Exchequer, providing £59.5bn on its own in 2008-09.
| There is a risk with increasing tax rates that some of the higher rate geese will waddle off and lay their tax eggs somewhere else John Whiting, PwC |
That was on top of the basic rate tax these higher earners paid on their earnings, savings and dividends.
The true significance of the 40% income tax band is that it generated 40% of all the income tax due to be paid to the government that year.
The Revenue's figures show that although the tax-take generated by the 40% band is expected to shrink this year to £53.6bn, as the number of higher rate payers declines, it will still amount to 39% of all the income tax paid in 2009-10.
This may help to explain why the chancellor was so keep to impose a new 50% tax rate from April 2010 on the taxable incomes over £150,000, and to erode the income tax allowances of those earning more than £100,000.
Warning
While the rich are getting fewer, the government is clearly keen to make sure that their contributions to its coffers do not shrink too far.
But John Whiting of PwC warns that some of these people may not sit around to see more of their income taxed at an even higher rate.
"There is a risk with increasing tax rates that some of the higher rate geese will waddle off and lay their tax eggs somewhere else," warned John Whiting.
"In evidence to the Treasury Committee the Treasury admitted that the 50% rate of tax would generate under 40% of the theoretical yield because of planning and movement of taxpayers," he pointed out.
According to research by the economics consultancy CEBR, the number of millionaires in the UK fell by more than 50% between 2007 and 2009, to just 242,000.
"The halving in the number of millionaires suggests a fall in tax revenues of seismic proportions in the coming years," said Ronnie Ludwig of accountants Saffery Champness.
Source: BBC News | Business
