The Institute for Fiscal Studies (IFS) have warned that more people on middle income salaries are going to be forced into paying a higher rate of tax as a result of the government’s plans to lower the threshold that triggers the higher 40p tax rate.

The IFS suggest that approximately 325,000 people will be hit by the higher rate when the change comes into effect in April 2013. They estimate that by 2014, 5 million people will be in the higher rate tax bracket, a rise of 1.3 million in the three years following 2011.

Annual incomes of over £41,450 will be subject to 40% income tax from April 2013. This threshold will fall from £42,475 and will see 15% of taxpayers fall into the higher rate tax, a value which has risen from 5% in the late 1980s.

However, the government need to make up for the estimated £3.5 billion in lost revenue from raising the personal tax free allowance to £9,205 per year. The chancellor has argued that by reducing the threshold for the higher rate of tax, they will stop these people from disproportionately benefiting from raising the personal allowance.

It is estimated that higher rate taxpayers will be £42.50 per year better off because of the rise in the personal allowance, whilst lower rate taxpayers will find themselves £170 per year better off.

At the same time, the government will reduce the higher 50p per pound rate of tax for incomes over £150,000 to 45p per pound. The threshold for triggering this tax rate has remained unchanged.

The government suggest that the 50p tax rate has failed to generate the revenue expected when it was introduced in 2010. When the Labour government introduced the 50p tax rate, they estimated an extra £2.5 billion in revenues, but the actual gain was closer to £1 billion.

The government believe that by cutting this rate to 45p, more people will pay and it will only cost £100 million in revenue. By introducing the new higher rate of stamp duty for homes over £2 million in value, they estimate that this will cover the loss from the cut.

Critics argue that reducing the rate will not necessarily address this issue as people with the highest incomes will continue to find ways to avoid triggering the top rate. At the same time, some suggest that the chancellor has not given the 50p tax rate enough time to properly assess its effect.

Whilst the government claim that the new tax system is simpler and fiscally neutral, the IFS director, Paul Johnson, warned that some figures were highly uncertain and that the outcome may not be as fiscally neutral as hoped.

The shadow Chancellor Ed Balls said: “George Osborne has taken a potentially hugely expensive gamble. By giving a £3bn tax cut to the very richest, an average tax cut of £10,000 to every top rate taxpayer, he is betting that he will somehow get £2.9bn back in extra tax revenues from people currently not paying the top rate of tax.”

A financial adviser from Health Insurance Solutions said that he was not surprised by the comments from the shadow chancellor.