Andy Burnham has been warned against increasing the top rate of income tax to 50 per cent should he enter Downing Street this September.
The former Greater Manchester mayor would face an immediate challenge of finding £4.7billion in savings or additional revenue to fund defence commitments announced by the Government last month.
The additional rate of income tax currently stands at 45 per cent on earnings above £125,140 a year, with both Burnham and his likely Chancellor, Ed Miliband, having previously expressed support for increasing it.
However, wealth specialists have warned such a move could generate only modest returns for the Exchequer while encouraging higher earners to change their financial behaviour or leave the UK.
The proposal would also directly contradict Labour’s 2024 manifesto commitment not to raise income tax, a pledge Burnham reaffirmed earlier this week.
Britain’s previous experience with a 50 per cent top rate has been cited by experts as evidence of the limited revenue such a policy can generate.
Labour Chancellor Alistair Darling introduced the 50 per cent additional rate in 2010 on earnings above £150,000, with the measure remaining in place until 2013.
The Office for Budget Responsibility initially estimated the policy would raise around £2.7billion a year for the Treasury, although the eventual returns fell well short of expectations.
Wealthy taxpayers warn Andy Burnham against 50 per cent income tax rise
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REUTERSThe watchdog found that at least £16billion of income was brought forward before the end of the 2009-10 tax year so it would be taxed at the previous 40 per cent rate rather than the new 50 per cent rate.
By 2012-13, the higher rate had generated only £600million in additional revenue, while many higher earners also delayed taking income after George Osborne announced in March 2012 that the rate would fall to 45 per cent from April 2013.
Robert Salter, a director at accountancy firm Blick Rothenberg, said: “The problem with touching the additional rate is that it brings in very little for the Treasury.
“Adding 1p would raise about £230million. By comparison, raising the basic rate by the same amount raises about £7billion.”
He added: “So it’s probably not worth it for Andy Burnham because it is so limited in what it can generate.”
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Despite the previous results, Mr Burnham told the Daily Telegraph in September that there was “definitely a case” for restoring the 50 per cent rate later in this Parliament.
Stephen Kenny, a tax partner at PKF Littlejohn, said: “The feeling at the minute is that it’s all a bit of a joke.
“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 follow Scotland’s approach by introducing additional income tax bands rather than increasing the headline additional rate.
Scotland currently operates six income tax bands, with a top rate of 48 per cent applying to earnings above £125,140.
He said this approach could technically avoid breaking Labour’s manifesto commitment not to increase the basic, higher or additional rates of income tax.
Mr Salter also suggested the Government could introduce a temporary “defence levy”, with the proceeds ring-fenced for military spending, mirroring the health and social care levy introduced by Boris Johnson after the pandemic before it was later scrapped.
Mr Salter said: “That would be a way of selling it to the public as a necessary measure in exceptional circumstances.”
Mr Kenny said: “Whatever Andy Burnham does, he needs to show he is going to lead a stable Government that won’t keep changing its mind.”