Andy Burnham has been warned that plans to raise the top rate of income tax to 50 per cent could deliver a financial disappointment while risking an exodus of wealthy taxpayers if he enters Downing Street this autumn.
The former Greater Manchester mayor would face an immediate challenge of finding an extra £4.7billion in savings or new revenue to fund Britain’s defence commitments, announced by the Government last month.
Mr Burnham has previously suggested there is a case for restoring the 50p additional rate of income tax, a move also backed in the past by his expected ally and potential Chancellor, Ed Miliband.
But tax experts have warned the policy could raise far less money than supporters expect, while encouraging high earners to reduce taxable income, delay earnings or relocate overseas.
The additional rate currently charges 45 per cent on earnings above £125,140. A rise to 50 per cent would also risk reopening a political battle over Labour’s 2024 manifesto pledge not to increase income tax rates — a commitment Mr Burnham reaffirmed earlier this week.
Britain’s previous experience with a 50 per cent top rate has been cited as evidence of the limited returns such a move may generate.
The rate was introduced by Labour Chancellor Alistair Darling in 2010 for people earning more than £150,000, before being reduced to 45 per cent by George Osborne in 2013.
The Office for Budget Responsibility originally estimated the measure could raise around £2.7billion a year, but later analysis showed the additional revenue was significantly lower.
The OBR found taxpayers brought forward at least £16billion of income before the rate came into force, allowing them to pay tax at the previous 40 per cent level.
By 2012-13, the additional revenue generated by the policy was estimated at only around £600million.
Robert Salter, director at accountancy firm Blick Rothenberg, said increasing the additional rate would have a limited impact on Treasury finances.
“The problem with touching the additional rate is that it brings in very little for the Treasury,” he said.
“Adding 1p would raise about £230million. By comparison, raising the basic rate by the same amount raises about £7billion.”
He added that the policy may not be worthwhile because of the relatively small amount it would generate.
Tax specialists have also warned that repeated speculation over wealth taxes and higher income taxes could damage confidence among high earners and investors.
Stephen Kenny, a tax partner at PKF Littlejohn, said some taxpayers were becoming frustrated by uncertainty surrounding future tax policy.
“The feeling at the minute is that it’s all a bit of a joke,” he said.
“Top earners are sick of all the rumours and conversations about wealth taxes, exit taxes and income tax rises.”
Mr Salter suggested Mr Burnham could instead look at Scotland’s approach, where multiple income tax bands exist, including a 48 per cent top rate on earnings above £125,140.
Another option could be a temporary “defence levy” specifically designed to raise funds for military spending.
Such a measure could be presented as an exceptional response to rising global threats, similar to the health and social care levy introduced after the Covid pandemic.
Mr Salter said: “That would be a way of selling it to the public as a necessary measure in exceptional circumstances.”
The tax debate is likely to become an early test of Mr Burnham’s economic credibility if he succeeds in moving from Manchester to Downing Street.
With Britain facing pressure to increase defence spending while managing tight public finances, any new government would need to balance security commitments with concerns over growth and competitiveness.
Mr Kenny warned that the priority for any incoming administration should be stability.
“Whatever Andy Burnham does, he needs to show he is going to lead a stable Government that won’t keep changing its mind,” he said.
For Mr Burnham, the challenge will be proving that Britain can fund a larger defence posture without undermining investor confidence or breaking key political promises.
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