George Osborne plans £42-a-month hand-out

Whitehall sources told The Scotsman the Chancellor was likely to agree to accelerate raising the level at which people do not pay tax to £10,000 in exchange for Liberal Democrat support to scrap the 50p income tax rate.

The raising of the threshold to £10,000 was meant to be completed by 2015, but sources suggest the move – which experts say will cost the Treasury £11 billion – is set to be completed by 2013. The move would not affect those who earn £100,000 a year or more, who pay tax on all their income.

The Chancellor has been under pressure from Conservatives back-benchers to cut the 50p rate for those earning £150,000 or more. They point to claims that it is losing the Exchequer £1bn a year, with wealthy people moving abroad to avoid it.

Mr Osborne has ordered the independent Office for Budget Responsibility (OBR) to hold a review into the 50p rate to find out how much it brings in.

According to Treasury figures, it is estimated to raise £6.7bn this year, but this week shadow chancellor Ed Balls said it would raise about £2.5bn.

The move to the scrap the 50p rate had been opposed by the coalition’s junior partners, the Liberal Democrats, until earlier this month, when Business Secretary Vince Cable signalled his party was willing to do a deal on the 50p rate if the Chancellor replaced it with a levy on wealth, such as their proposed “mansion tax” on properties worth £2 million or more.

However, the Lib Dems have made clear their priority is to help low earners by accelerating the raising of the income tax threshold to £10,000.

Taxation has dominated talks of the so-called “Quad” of top ministers – Tories Mr Osborne and Prime Minister David Cameron, and Lib Dems Deputy Prime Minister Nick Clegg and Chief Secretary to the Treasury Danny Alexander.

Last night, sources said agreement had been reached on the two ends of the tax scale, with the threshold raised to £10,000 by 2013 and the 50p rate dropped.

A senior coalition source said there was “likely to be a quid pro quo” on the two parties’ tax-cutting policies, although other details “are still being thrashed out” ahead of Wednesday’s Budget.

The discussions will focus on how to pay for tax cuts, with Mr Osborne insisting there can be no giveaways without money being raised elsewhere.

The threshold increase is likely to be matched by a lowering of the point at which taxpayers go on to the higher rate of 40p.

However, the Lib Dems are still pressing for a mansion tax on the most expensive homes, or the creation of higher council tax bands as a tax on wealth – a move strongly opposed by Tory back-benchers.

Alex Henderson, a tax partner at PricewaterhouseCoopers, said raising the threshold to £10,000 would mean the Treasury having to find £11bn.

“A £100 increase in the personal allowance is estimated by HMRC to cost at least £0.5bn. To raise the tax threshold ‘further and faster’ beyond existing plans would cost £11bn,” he said.

The Institute of Chartered Accountants of Scotland (ICAS) endorsed raising the tax threshold more quickly to £10,000, which it said would put money into people’s pockets.

Derek Allen, ICAS’s director of tax, said the 50p rate was “too easily avoided”.

He went on: “It won’t yield anywhere near the £6.7bn estimated when it was first introduced.

“The difficulty with the 50p tax is that, once people know it is temporary, they will take measures to defer taking income and so avoid it.

“What this government needs to do is to give confidence to business and to the population in general. People are holding on to what savings they have, they’re not spending money. Consistency and clarity is needed.

“That said, the latest figures on the economy show that the full tax yield is slightly higher than expected.”

Mr Allen added: “A prompt promise to raise the threshold to £10,000 would help those on lower incomes and the squeezed middle.

“This would require a balancing act at a time when the government is trying to reduce the deficit. However, it makes more administrative sense than currently taxing at a lower level and then having to give back in tax credits.”

However, the plans have been branded “unfair” by economic think tank the Institute of Fiscal Studies (IFS).

In a study on how progressive the policy is, the IFS’s James Browne said: “The common assertion that increasing the personal allowance is progressive is true if one considers the gains across individual income taxpayers. It is not true if one considers the gains across all families, as relatively few of the poorest families contain a taxpayer and two-earner couples gain twice as much in cash terms as one-earner families.”

Mr Balls – who has been calling for a temporary cut in VAT and the imposition of a bank bonus tax – last night claimed the government was in disarray over its tax policy.

He said: “The Chancellor’s plan is failing on jobs and the deficit. The last couple of weeks have been a complete shambles in the run-up to the Budget.

“But the idea that, when fuel bills are going up, tax credits are being cut and families are under real pressure, his first priority is to cut taxes only for those over £150,000? That is the wrong priority. It would be completely out of touch.

“I hope even at this late stage he will change course and help families in our country. That’s what we need.”

He added: “If the government imposes a mansion tax on the biggest properties, then we’ll support that. But the priority has got to be to reverse the terrible cuts in tax credits and get jobs for young people.

“If the Liberal Democrats are saying they’ll back George Osborne on cutting the top rate of tax as the first priority for people over £150,000, that would be totally the wrong priority, totally out of touch. The last couple of weeks have been a shambles.

“I fear George Osborne has lost control of this Budget. But if he’s going to try and bail himself out with a cut in the top rate of tax, I think people will look at that and say: What’s he up to?”

Scottish Tory leader Ruth Davidson said earlier this week she supported accelerating the raising of the threshold, which was taken by some commentators as a clear signal it would appear in the Budget.

One senior Lib Dem source told The Scotsman: “Clearly, the Tories are trying to steal the credit for this idea from us, but it is a Lib Dem policy.”

A Downing Street spokeswoman dismissed details of what was likely to appear in the Budget as “speculation”.