Prime Minister Andy Burnham has suggested that reviving a 50p top tax rate is a possibility as he seeks to alleviate the financiial burden on low-income citizens. The leader signaled a review of frozen tax thresholds shortly after entering 10 Downing Street.
The £120 billion 'stealth raid' since 2021
The current fiscal tension stems from a decision made in 2021 to freeze all income tax allowances, a move intended to help cover the £400 billion cost associated with the Covid-19 pandemic. As the report indicates, this freeze was extended by Rachel Reeves to last until the end of the decade. because inflation has continued to rise while these thresholds remained static, millions of taxpayers have been pushed into higher brackets despite no real-term increase in their purchasing power.
This mechanism has effectively functioned as a massive revenue generator for the government, bringing in a staggering £120 billion annually . For many low-income families, this has resulted in paying income tax for the first time in their lives. The Labour Party has already overseen tax increases totaling nearly £70 billion since taking office two years ago, pushing the overall UK tax burden to its highest point in history.
A £1 billion gamble against the 2024 manifesto
To counter the pressure on low earners, Andy Burnham is considering the reinstatement of a 50p top tax rate for individuals earning more than £125,140. Currently, the top rate stands at 45p. While this move would be a symbolic victory for left-wing MPs within the Labour Party, it represents a significant political risk. According to the source, the Labour Party's 2024 manifesto explicitly promised not to increase any of the main tax rates.
Furthermore,the fiscal impact of such a move is relatively minor compared to the cost of easing threshold freezes.. Reinstating the 50p rate is estimated to raise as little as £1 billion per year. Prime Minister Andy Burnham has stated that he intends to stick to the manifesto, yet he refused to rule out the rate hike, calling the question "premature" while he settles into his new role.
Protecting pensioners from the £12,570 tax floor
A primary driver for this tax shake-up is the plight of low-income pensioners. The current starting rate for tax is set at £12,570, but the basic state pension is expected to exceed this amount next year. This means a growing number of retirees will be forced to pay tax on their primary source of income, a trend Andy Burnham noted was a frequent complaint during his time on doorsteps in Makerfield.
The Prime Minister has exprsesed concern that the frozen personal allowance has disproportionately harmed those on the lowest incomes. while easing this freeze would allow workers and pensioners to keep more of their earnings, the government faces a dilemma: such a move would cost billions of pounds at a time when the UK's financial circumstances remain precarious.
Sir Mel Stride's demand for welfare spending cuts
The proposal has already met resistance from the opposition, with Shadow Chancellor Sir Mel Stride arguing that tax cuts must be funded through spending discipline rather than further borrowing or tax hikes elsewhere. Sir Mel Stride specifically pointed to the welfare bill as a primary area where the government should seek savings to avoid destabilizing the economy.
This leaves several critical questions unanswered. It remains unclear exactly how Prime Minister Andy Burnham intends to fund the relief for low-paid workers if the 50p tax rate only yields £1 billion. Additionally, the government has not specified which "flexibility" within the existing fiscal rules it will use to borow more money without triggering market volatility. For now, the Labour Party has provided no concrete plan on how it will balance these competing priorities in the upcoming Budget.
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