George Osborne urged to use first Tory budget to slash the 45p top rate of tax

George Osborne has been urged to use next month’s budget to cut the top rate of tax on people earning over £150,000.

Former Tory chancellor Lord Lawson said the 45p rate should be abolished altogether – claiming it would attract business to Britain and cost the Exchequer little in lost revenues.

The Conservative peer’s remarks came amid claims Mr Osborne had ‘indicated’ in Treasury meetings that he was considering scrapping the higher rate when he delivers his Budget on July 8.

In the last parliament Mr Osborne reduced the rate from 50p to 45p but was prevented from going further by the Liberal Democrats.

A further reduction now would, however, be highly controversial at a time when ministers are planning £12 billion in welfare cuts.

Mr Osborne, however, wants to use next month’s first Conservative-only budget to make a radical shift to David Cameron’s vision of a ‘lower tax, lower welfare’ economy.

In the run up to the election, the Prime Minister repeatedly refused to rule out scrapping the higher rate.

He said cutting the top rate of tax was not in his ‘plan’, but refused to rule it out.

According to the Financial Times, Mr Osborne has ‘indicated in Treasury meetings that he might cut the 45p tax rate on earnings above £150,000’.

Former Tory chancellor Lord Lawson said the 45p rate should be abolished altogether

But Lord Lawson has urged Mr Osborne to make the move. The Tory peer said he would ‘strongly support’ any cut, adding that it would ‘significantly enhance the attractiveness of the UK as a place to do business, at no cost in terms of lost revenue’.

He told the Financial Times: ‘That was the experience when I brought the top rate down to 40 per cent in 1988 and it is even more relevant today.’

The move would be welcomed in the City of London, where banks have complained about high taxes.

Labour increased the rate from 40p to 50p in 2009 after the financial crash, and Mr Osborne cut it to 45p in his 2012 Budget.

The Conservatives have already promised to cut pension tax relief for the highest earners and Mr Osborne is also expected to announce a £5billion crackdown on tax avoidance.

He will also use the Budget to raise the income tax threshold for those on low earnings and to make progress towards a £50,000 starting rate for the current 40p rate.

When the former Labour chancellor Alistair Darling announced plans to introduce a 50p income tax rate on incomes above £150,000 from 2010-11, it was originally estimated to increase tax revenues by £2.7 billion a year.

But Mr Osborne commissioned HMRC to analyse the 2010-11 tax returns to assess how much extra tax had actually been raised. It estimated that the 50p rate brought in £1bn more than the 40p rate.

Cutting the rate back to 45p was estimated to cost £100m, suggesting that reducing it to 40p would cost at least £900,000.

The estimates of the cost of reducing the top tax rate are subject to large margins of errors.