With Andy Burnham on the verge of entering Number 10, the threat of an income tax rise is growing.
Mr Burnham told this newspaper last year that there was “definitely a case” for raising the top rate of income tax from 45pc to 50pc.
More than a decade ago a 50pc rate was also proposed by Ed Miliband in his doomed 2015 election campaign. Now, the controversial Energy Secretary is popular among Labour party members and is seen as the favourite to replace Rachel Reeves as Chancellor if Mr Burnham becomes prime minister.
An income tax rise would break a key manifesto pledge for Labour not to raise taxes on “working people”, which ruled out increasing the rate of income tax, National Insurance and VAT.
And while Mr Burnham said in a speech on Monday that his leadership plans were “consistent with the 2024 manifesto”, he will need to raise money – and quickly. He will have to find an extra £4.7bn at least to fund the outgoing prime minister Sir Keir Starmer’s defence investment plan.
The former Manchester mayor is also considering devolving income tax, according to Lord O’Neill, tipped to become Mr Burnham’s chief economic adviser. This could open the door to workers paying different tax rates depending on where they live.
But Mr Burnham is not the only politician in recent history to flirt with a 50pc tax rate – and the Government’s own assessment shows why it could backfire.
The 2010 tax rise
Not too long ago, 50pc was the top income tax rate in Britain.
Former Labour chancellor Alistair Darling increased the top rate from 45pc to 50pc in 2010. Back then, the additional rate applied to income over £150,000 – as opposed to £125,140 today.
But the 50pc rate raised much less than expected. The Office for Budget Responsibility initially estimated it would generate around £2.5bn a year. But HMRC then found in an assessment that it had raised less than half of that – under £1bn annually.
Mike Hodges, of accountancy firm Saffery, said: “The most recent experiment with a 50pc top rate of income tax which lasted for three tax years from April 2010 wasn’t a conspicuous success and should probably serve as a warning for any future chancellor.”
One reason was that workers brought forward around £16bn of their income to reduce their exposure to the incoming rate rise.
