THE Liberal Democrats outflanked David Cameron yesterday with a promise to cut the income tax bills of millions of low-income families by up to £1,000 a year.

Two million households would stop paying tax under the Lib Dem proposals, which would cut the main income tax rate by 2p to 20p, would scrap the 10p tax rate and would raise the threshold at which people start paying 40 per cent tax from £38,000 to £50,000.

Mr Cameron has angered Tory activists by warning them that the party may not offer any specific tax cuts at the next election, with economic stability the top priority. Rightwingers will be furious if the Lib Dems offer more radical tax-cutting policies than the Tories.

The Liberal Democrats have decided to target the hundreds of thousands of people who now pay 40 per cent tax because the threshold has moved up only slightly while earnings have soared. They say that if the threshold were raised to £50,000, 1.3 million people, many of whom work in the public sector, would be spared the higher rate.

The tax cuts would be paid for by a huge increase in taxation on polluters, with airlines targeted in particular.

The existing airport passenger tax — a tax on tickets — would be replaced by a new tax on aircraft that would be based on emissions.

That would act as an incentive for airlines to make sure that their aircraft are full, and would lessen the impact on the fares of the no-frills airlines. Changes in vehicle excise duty would punish the worst polluting cars, raising by ten times the tax on 4x4s to £2,000. Even medium-sized cars would face tax bills of £1,500 a year.

The climate change levy on energy-intensive companies would be replaced by a carbon tax. The green taxes will put pressure on Mr Cameron, who has been campaigning heavily on green issues but has no tax policies in place to punish polluters.

The Lib Dems plan to raise revenue by reducing the 40 per cent tax relief on pensions owned by high earners to 20 per cent, and scrapping the new generous taper on capital gains tax. The whole tax package is revenue neutral, meaning that the Liberal Democrats will pledge to match Labour’s public spending commitments at the election.

Vince Cable, the Liberal Democrat Treasury spokesman, said that the package would tilt the tax system in favour of the least well off.

“These proposals demonstrate our commitment to tackling inequality and environmental damage while maintaining financial discipline,” he said. “The tax changes totalling £18 billion a year are the most progressive policies proposed by any party in recent history.

“This is achieved without raising overall levels of taxation. The changes in income tax will make the tax system fairer for those on low and middle incomes. Specifically this will benefit the vast majority of pensioners, key public sector workers and young professionals.”

... BUT DRIVERS LEFT TO PAY THE BILL

Vehicles in the highest group, including the Porsche 911 and Renault Espace, would increase from £210 to £2,000

Times Recommends

• Tree stump 'shows image of Virgin Mary'
• BBC drops Strictly judge for younger model
• Trafalgar Square 'reduced to a spectacle'