14/03/2014 05:25 GMT | Updated 14/03/2014 05:59 GMT

Budget 2014: George Osborne Warned By Lawson And Lamont On 40p Tax Rate

Stefan Rousseau/PA Wire
Chancellor of the Exchequer George Osborne addressing the Open Europe conference in London today where he has raised the prospect of Britain leaving the European Union if the 28-nation bloc fails to undertake fundamental reforms to improve competitiveness, create jobs and protect the rights of countries which are not in the single currency.

George Osborne has come under further pressure to help middle-income earners as former chancellor Lord Lawson of Blaby said "far too many people" are caught in the 40p income tax band.

Another former Tory chancellor, Lord Lamont of Lerwick, called for the threshold to be raised, warning that unless action is taken 40p could become the basic rate.

As the Chancellor prepares for next week's Budget, there has been growing clamour for a significant rise in the level - currently £42,150 - at which the 40p rate kicks in, with many Tories arguing that this should take priority over a further increase in the personal allowance from £10,000 to £10,500.

Lord Lawson, who introduced the 40p rate in 1988, said it had been intended for the rich, not the "middling professionals" being hit today.

In a Daily Telegraph interview the Tory peer said the Chancellor should use the March 19 statement to knock a penny off the basic rate of tax instead of giving in to Lib Dem pressure to raise the personal allowance.

When the 40p rate was introduced - by slashing the top rate of tax from 60p - it was paid by around 1.35 million people.

But the level at which the 40p rate takes effect has become increasingly contentious because of a series of below-inflation upgrades which have seen the number paying the higher rate expected to swell to more than five million in a process known as "fiscal drag".

"Far too many people are paying the 40% rate. The total should be much closer to the number when I was chancellor," Lord Lawson said.

"It was intended for the rich, the well-off. The people who are paying it today are middling professionals who should not be in the higher rate."

Those affected "are neither rich nor poor" and "no one on £45,000 should be paying a marginal rate of 40% tax", Lord Lawson added.

He said the personal allowance increases, although reasonable at first, had gone "too far" and were a "mistake".

Lord Lawson said: "It is a function of coalition government that the Budget is negotiated with the Liberal Democrats, who are very hostile to those on middle incomes. It means George Osborne is not able to produce the Budget he would like to."

He said cutting the basic 20p rate to 19p would "give people the encouragement that rates will continue to go down".

Lord Lamont told BBC2's Newsnight: "Of course there is an argument for giving relief at the bottom but is that going to be at the price of really squeezing the centre - people who are teachers, who are nurses, who are Tube drivers, who are staff sergeants in the Army, people just earning £40,000 - that is not a lot of money.

"Those people have been dragged into this 40% band. This has gone up 36% since 2010, it is thought that by 2016 there will be six million people in this band."

He suggested a rise in the threshold to £44,000 "as a first step", and added: "In the long run you can't go on and on not increasing this commensurate with earnings.

"You will end up with a situation where the 40% becomes the basic rate. That is complete nonsense."

Prime Minister David Cameron gave little encouragement to the voices in his party calling for action on the 40p rate. Cameron said: "I am a tax-cutting Conservative. I want to see us relieve people's tax burden.

"We have chosen to do that through raising the personal allowance. That helps everyone earning under £100,000.

"In April this year, people will see something like £700 benefit from having £10,000 tax-free.

"We are a tax-reducing Government. The only way you can do that is by keeping control of public spending, which we are doing and other people won't.

"By raising the personal allowance, which we will have taken to £10,000 by April, that benefits everyone earning under £100,000.

"This is a tax cut which definitely helps low-paid people, because we've taken so many people out of tax, but it actually helps people all the way up the income scale."

Asked in a BBC interview why he appeared to have set his face against a rise in the threshold for the 40p rate, Cameron said: "What I am determined to do is to go on delivering tax cuts for low and middle-income earners, and from April this year there will be £10,000 you can earn before you start paying tax, and that has been benefiting everybody earning up to £100,000.

"That's a significant tax cut, a huge change since I became Prime Minister, and demonstrates that as we take these difficult decisions in our long-term economic plan to turn our country around and make sure our economy works for everyone, we are reducing people's taxes.

"The point is people on the upper rate have benefited from the £10,000 tax-free income you can earn before you start paying taxes and that is the way it should be."