New Prime Minister Andy Burnham has indicated a potential shift in tax policy, opening the door to the reintroduction of a 50 pence top tax rate to fund measures aimed at alleviating the cost of living crisis. Burnham, speaking shortly after entering office, declined to rule out the possibility, stating that such a discussion would be "premature" but acknowledging past statements where he suggested there was "definitely a case" for the higher rate.
This comes despite Labour's manifesto commitment not to increase the current top tax rate of 45 pence. Burnham emphasized that any plans to support people with the cost of living would be fully funded. He also signaled an intention to review the freeze on tax thresholds, which has been in place since 2021 and is set to continue until the end of the decade. He expressed particular concern about the impact of this freeze on low-income pensioners, whose basic state pension is projected to exceed the current tax-free allowance next year.
"I heard issues related to the personal allowance more than anything on doorsteps in Makerfield," Burnham stated, referring to his constituency. "I think it's been frozen now, hasn't it for a number of years, so it has dragged more people in - pensioners, I think - and that particularly I think has become a growing issue."
The freeze on income tax allowances, initially implemented in 2021 to help manage the costs associated with Covid-19 and later extended by former Chancellor Rachel Reeves, has become a significant source of government revenue due to high inflation. This "stealth raid," as described, is reportedly generating approximately £120 billion annually and has led millions into higher tax brackets, with some low-income families paying income tax for the first time.
Reinstating the 50p top tax rate, which applies to earnings over £125,140, is estimated to raise a relatively modest sum, potentially around £1 billion per year. Nevertheless, it would represent a departure from the Labour party's 2024 manifesto pledge. While Burnham reiterated his commitment to the manifesto, some left-wing members of the party are reportedly advocating for the symbolic increase in the top rate.
Burnham also indicated that he would operate within Labour's fiscal rules but would utilize any flexibility available, asserting that his approach would not involve taking risks with the economy. Shadow Chancellor Sir Mel Stride commented on the situation, stating that any proposed tax cuts would need a clear funding plan, preferably through public spending controls, particularly on welfare, rather than increased taxes or borrowing.