IMF Warns Against Raising Top Tax Rate as Mayors Push for Fiscal Devolution

What the IMF actually said

The International Monetary Fund carries out an annual health check of the UK economy, known as an Article IV assessment, and its latest report advised the incoming government against raising the top rate of income tax. The Fund's reasoning centres on the risk that higher top-rate taxation discourages work among high earners and increases the incentive for some to relocate or restructure their income, which can reduce total tax revenue even as the headline rate rises. Instead of a higher top rate, the IMF's assessment pointed toward broader-based measures, including higher rates on lower earners, as a way of raising revenue without the same behavioural response.

The context for this advice is that the UK's overall tax burden, measured as tax revenue against GDP, is projected to reach a historically high level in the coming years. The IMF's assessment describes the country as approaching the practical limit of how much further revenue can be raised through the current tax structure, noting that VAT and property-related taxes are already above the average seen in comparable economies, and that wealth taxes are difficult to design and collect effectively. This is why the Fund's recommendation was framed around the composition of any future tax rises rather than simply cautioning against raising more revenue at all.

The 60% band that already exists

One feature of the current system is often missed in the top-rate debate: earners with income between £100,000 and £125,140 already face an effective marginal tax rate of around 60%, even though the official top rate of income tax is 45% and only applies above £125,140. This happens because the personal allowance, normally £12,570, is gradually withdrawn once income passes £100,000, at a rate of £1 of allowance lost for every £2 earned above that threshold. The result is that income in this band is taxed at the equivalent of 60p in the pound once the lost allowance is accounted for, before National Insurance is added on top. Any future tax reform affecting high earners is likely to interact with this existing taper, whether or not the headline top rate itself changes.

What fiscal devolution to mayors could mean

Separately from the IMF's national tax advice, plans have been developing for regional mayors to gain a greater share of the tax revenue raised in their own areas, sometimes described as fiscal devolution. The Treasury has committed to publishing a fiscal devolution roadmap, expected alongside a future Budget, which is intended to set out in more detail how this could work in practice. Some elements of this agenda are already in law: the English Devolution and Community Empowerment Act 2026 gives mayors the power to introduce a Community Infrastructure Levy, a charge on large-scale commercial property development, and separately provides for an overnight visitor levy, often referred to as a tourist tax, although that power is not expected to be usable before 2028 at the earliest.

Broader proposals around mayors retaining a direct share of income tax raised in their region go further than what is currently legislated, and would represent a more significant shift in how UK tax revenue is allocated between central and local government. Any such change would need to work alongside, rather than in conflict with, the IMF's broader concern about the total tax burden, since devolving how existing revenue is distributed is a different question from raising the overall amount of tax collected.

What this means for taxpayers now

For most taxpayers, neither development changes anything immediately. The IMF's assessment is advice to government, not a change in policy, and the top rate of income tax remains 45% on income above £125,140 unless and until a Budget changes it. Similarly, the fiscal devolution roadmap has not yet been published in detail, so the practical effect on local taxation in any given area is not yet known. The clearest near-term relevance is for higher earners already inside the £100,000 to £125,140 taper band, who are affected by the existing marginal rate regardless of what happens to the headline top rate, and for anyone in a mayoral area where new devolved levies, such as a visitor levy, are eventually introduced.

Frequently asked questions

What is the current top rate of income tax?

The additional rate of income tax is 45% and applies to taxable income above £125,140.

Why do some earners pay an effective 60% tax rate?

Between £100,000 and £125,140, the personal allowance is withdrawn at £1 for every £2 earned, which combined with the 40% higher rate produces an effective marginal rate of around 60% on income in that band.

Has the top rate of income tax actually changed?

No. The IMF's assessment is a recommendation to government, not a change in policy, and any change to the top rate would need to be announced at a Budget.

What powers do mayors currently have to raise local taxes?

Mayors can introduce a Community Infrastructure Levy on large commercial developments under the English Devolution and Community Empowerment Act 2026, and have been given the power to introduce an overnight visitor levy, though that is not expected to be usable before 2028.

When will the fiscal devolution roadmap be published?

The Treasury has committed to publishing a fiscal devolution roadmap, expected to accompany a future Budget, though an exact date has not been confirmed.