To escape from paying the higher rate of tax, people who earn more than £150,000 are resorting to legal tax avoidance schemes.
Mounting pressure is already on the Chancellor to axe the 50p rate next year, although the move has been met with criticism, however, this news will add further pressure onto Mr Osborne to relieve high earners from the tax rate.
Paul Johnson, director of the IFS, said: “It looks like the 50p rate may be too high and that it is possible it will reduce tax revenues.
“It could lead to more people investing in tax avoidance, illegally hiding their income or even leaving the country altogether. I wouldn’t have introduced the 50p rate in the first place.”
The IFS also said that the highest rate that could be introduced without tax revenue being reduced is around 40 percent.
In response to the calls to axe the tax, Mr Osborne has also called on HMRC to review the tax rate over the next year and to see what impact it has on the economy. Previous figures released by the Treasury show estimates of £2.7 billion being raised each year by the tax.
The 50p tax rate was introduced by Labour, and currently 320,000 people are hit by the tax, or one per cent of taxpayers, according to HMRC.
The Government is divided on whether to keep the tax on high earners in place. Nick Clegg believes that if it is axed it should be replaced with a “mansion tax” on homes worth more than £2 million.
The IFS claims there are other methods in order to tax the wealthy. Mr Johnson said: “Wealth inequality has grown very strongly over the past few years, so if you are worried about it, inheritance tax is relatively useful.”
The review of the UK tax system, which was done over five years, will not be welcome news for the Chancellor. The IFS said the economy was losing tens of billions of pounds due to the bureaucracy and inefficiencies of Britain’s current tax system.
"For more information, please contact Glazers, Chartered Accountants London or visit www.glazers.co.uk
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