Prime Minister could bring back levy for top earners in bid to balance country’s finances

Rishi Sunak may approve a shock rise in the top rate of tax to fill a £60billion hole in the public finances.

Whitehall sources said the 45p rate paid by those earning at least £150,000 could be put back to the 50p level imposed by Labour in 2010.

The move would break the Tories’ promise in 2019 to leave the headline rates of income tax, VAT and national insurance unchanged.

But a source said the dire situation was forcing Mr Sunak and Chancellor Jeremy Hunt to ‘think the unthinkable’.

Raising the top rate of tax would cap a farcical series of events that saw Kwasi Kwarteng cut it to 40p in September only to restore it to 45p the following month.

Mr Hunt announced £32billion in tax rises within days of taking office as he sought to calm financial markets. He is now planning a further £25billion in taxes, alongside up to £35billion in cuts.

He is also planning a raid on capital gains tax, including halving the tax-free allowance. And, in the biggest round of stealth taxes for years, all thresholds will be frozen for income tax, national insurance, inheritance tax and pension allowances.

Rishi Sunak may approve a rise in the top rate of tax from 45p to the 50p – the same level imposed by Labour in 2010

A Treasury source said the package was needed to curb the soaring prices now causing havoc with household budgets.

But former Tory leader Sir Iain Duncan Smith warned: ‘It would be completely ridiculous to raise taxes further now in order to fill a notional hole in the finances in a few years’ time. All you would do is plunge us into a deeper recession and the deficit will increase even further. If we go down that route then our goose is cooked.’

The row came as:

• Work and Pensions Secretary Mel Stride hinted pensions and benefits would rise in line with inflation next year;
• The Chancellor warned the Cabinet that Britain could be dragged into a recession that is forecast to hit one in three nations next year;
• Mr Sunak was on the brink of a major gas deal with the United States that could help head off power blackouts;
• The Bank of England’s chief economist warned that interest rates would have to rise further to tackle inflation;
• Grocery prices have surged by 14.7 per cent, adding almost £700 to annual bills, figure show.

The 45p rate is currently only paid by those earning at least £150,000

The Treasury source said a radical package was needed, adding: ‘The number one thing that is causing pain for millions is inflation – the hidden tax eating into pay cheques, savings and the weekly food shop. When inflation is high, interest rates increase too, pushing up the cost of mortgages and business loans. We have to wage a war on inflation.’

A Whitehall source said ministers were looking at raising the top rate after being warned that the current package of tax hikes and spending cuts ‘doesn’t add up’.

There are no plans to raise either the basic rate of tax or the 40p rate. Ministers had considered squeezing pensions and benefits by raising them in line with earnings instead of inflation. The move would have left payments going up by 5.5 per cent rather than 10.1 per cent and could have saved more than £5billion a year.

But Mr Stride hinted heavily yesterday that the Government would try to avoid accusations of targeting the poor by ensuring pensions and benefits kept up with prices.

Work and Pensions Secretary Mel Stride hinted pensions and benefits would rise in line with inflation next year

‘Pensioners are absolutely at the forefront of the group that we want to really protect as much as we can through these difficult times,’ he said. ‘Hard choices have to be made, but within those hard choices there is a core mission and that is to look after the most vulnerable.’

The Treasury has already warned that ‘everybody’ will have to pay more tax as a result of the decisions expected next week.

Sources said the greatest burden would fall on those with the ‘broadest shoulders’.

A senior Conservative suggested that Mr Sunak, who along with his wife is said to be worth around £730million, might be considering a hike in the top tax rate to soften criticism of his own wealth.

‘Rishi doesn’t consider anything without asking “how will this make me look?”’ the source said. ‘A 50p tax rate will help him paint himself as no friend of the rich.’