Before I speak to the teacher, can anyone tell me whether or not it is common to keep everyone in the "top set" at the same level rather than upping levels individually?
I would speak to the teacher, and perhaps it was an oversight, the level will be adjusted, and then all is well.
But there really is little point in knowing if it is common or not, good practice or not, to keep the top group on the same book band (I would say it is not uncommon, but not good practice either). If the school has decided to keep your DD on a level way lower than her ability, for a reason rather than due to an oversight/mistake, then I would expect chances of them being convinced by any arguments, to be slim. If you tell them 'but no other school does it this way' or 'but her books are meant to match her abilities' then they will just nod and smile - or tell you that you know nothing - and keep doing what they are doing.
In that case you end up doing what many parents of able readers do: Provide your child with appropriate books and treat the school books as a minor inconvenience that occasionally needs to be attended to. At least at green level the books are so short that they can be read in a minute or two, if they must be read.
It's a shame (if that should be the case) that school won't provide appropriate books, but that is a minor issue and not worth fighting battles over.
On a side note, if your 5yo does get given gold/white/lime books, I'd suggest vetting them for age suitability. DS in Y1 and Y2 had a fair number of books that left him with nightmares, made him cry, or went totally beyond his context (e.g. required historical knowledge of the American civil rights movement) to understand at all. In a way it makes life easier if you have quick and easy and safe school reading books and can carefully pick your own longer, harder, but still age-appropriate books for reading at home.