Lib Dems plan exemptions on tax

Under Sir Menzies Campbell, the Lib Dems want a "fairer" tax system

The Lib Dems are unveiling plans which they say would stop two million people on low wages paying income tax.

The party would scrap taxes for anyone earning under £7,185 per year, while its top rate of 40% would apply only to those with salaries of £50,000 or more.

Penalties on "environmentally-damaging lifestyles" would fund the changes, including dramatic rises in road taxes for high polluting cars.

There would be a top band of £2,000 on cars causing the greatest pollution.

The proposals will be put to a vote at the party's conference in September in what leader Sir Menzies Campbell has admitted will be a test of his authority.

Click here to see the current vehicle excise duty bands

In May, the Lib Dems announced they intended to put forward major increases in vehicle excise duty, but its policy paper - entitled Fairer, Greener, Simpler - is the first time it has broken down the charges in any detail.

Any cars in groups A and B, generating up to 120 grams per kilometre of carbon dioxide, would be excluded from road taxes altogether.

Rises in road tax for polluting cars will help to pay for income tax cuts

The annual charge for vehicles in group E - including Ford Mondeos and Vauxhall Vectras - would jump from £150 to £850.

The class above, which features Audi A4s and the BMW 5 series, is currently £190 per year but would change to £1,500.

And there would be a £2,000 charge in top group G - for cars like Porsche 911 Carrera Coupes and the Renault Espace 2 litre petrol. It is a vast increase from the present level of £210.

'Fairer system'

The party would abandon the lowest band of income tax, which stands at 10p, and would also cut the basic rate from 22p to 20p.

It says the "very well off" would pay more tax on windfalls on things like capital gains.

Treasury spokesman Vince Cable said the tax cuts were "expensive", costing £18-20bn but he insisted the gap could be made up.

"The changes in income tax will make the system fairer for those on low and middle incomes," he said.

"Specifically this will benefit the vast majority of pensioners, key public sector workers and young professionals.

"These tax cuts for the majority will be paid for by the wealthy and those with environmentally-damaging lifestyles."

It is only fair and balanced to do even more to help those on low incomes by asking very high earners to pay a little more in income tax Dr Evan Harris, Liberal Democrat science spokesman

He said the current tax system was not fair, because the lowest-earning fifth of households paid proportionally more tax than the richest fifth.

The Lib Dems also want to raise the threshold for National Insurance contributions so they start at the same level as income tax, in a simplification of the system.

But the party's science spokesman, Dr Evan Harris, said he favoured a 50% top rate on earnings over £150,000 to make the proposed tax package "fairer".

"While these proposals do raise significant amounts of revenue from high levels of wealth, this is less true of high incomes," he said.

"It is only fair and balanced to do even more to help those on low incomes by asking very high earners to pay a little more in income tax."