‘A luxury levy is the politically savvy way to ensure the rich pay more tax’

The Chancellor faces a familiar dilemma at the November 2025 budget. Taxes must rise, and intense debate continues over whether she should break the manifesto pledge to avoid increasing income tax, VAT, and NICs. However, across calls for higher top rates of income tax, a mansion tax and an annual wealth tax, there is a broad consensus that the wealthiest must shoulder the greatest burden.

One option, inspired by similar policies in Australia and Canada, is a luxury levy on high-end goods – a consumption tax which would be economically rational, raise significant revenue and ensure the burden of taxation falls squarely on those who can afford it.

Economist Robert Frank identifies certain goods as ‘positional‘ – they derive their value largely from exclusivity. For example, a designer hoodie which everyone could afford would quickly stop feeling like a designer product – we value these items precisely because others cannot have them.

READ MORE: ‘Raising taxes on the wealthy isn’t just about the money’

This creates an unusual dynamic. Producing more positional goods doesn’t directly make society better off in the ways that many of us care about. Because of how we value them, positional goods cannot make an owner of the good better off without making someone else worse off. Luxury industries –which largely produce positional goods – may draw investment, effort and talent away from sectors the government has explicitly prioritised in its Industrial Strategy; those which are more crucial to economic growth, national security, and societal wellbeing.

We already operate a small tax on luxury cars through the expensive car supplement to Vehicle Excise Duty – a flat rate of £3,100 must be paid over a six-year period for cars worth more than £40,000. Expanding this to a broader luxury levy – covering high-end clothes, jewellery, accessories, and premium spirits – would reduce the need for broad tax increases that affect all industries, protecting the sectors we consider more socially valuable.

Australia’s long standing luxury car tax, with significantly higher rates than Britain’s version and a smaller market, raised approximately £600 million in 2023-24. Canada’s luxury tax was introduced in 2022, but will no longer be applied to yachts, as this part of the tax failed to raise significant revenue – a lesson on the importance of considering behavioural responses when designing new taxes. South Korea and Taiwan apply broader luxury taxes across high-end jewellery and furniture.

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Frontier Economics and Walpole’s 2024 report on Britain’s luxury sector found that the luxury automotive sector generated £33 billion in sales in 2022, with “fashion and accessories” at £10 billion, and “beauty, wellness and grooming” and “jewellery, watches and precious metals” at £3 billion each. Even accounting for behavioural responses – a luxury levy will reduce overall sales – this provides a large base to raise revenue from.

Britain’s approach should learn from international experience. The £40,000 threshold for paying the expensive car supplement should be raised to support electric and self-driving vehicle adoption, but the flat rate of £3,100 should be replaced with a higher rate of 10% over the six-year period. The broader luxury levy should avoid yachts but include high-end clothes, jewellery, accessories, and premium spirits, offering a broader base than Australia and Canada. This may work best as a small top-up on VAT – close to 5%. Like the expensive car supplement, this should only apply above price thresholds, which are tied to inflation and carefully set to balance the aims of targeting the wealthiest and maintaining a broad base from which to raise tax revenue.

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A luxury levy would be politically smart – it would primarily fall on the wealthiest, including wealthy tourists visiting London, while sparing working-class voters in Labour-Reform battleground seats across the Red Wall. By demonstrating Labour’s commitment to taxing the wealthiest, it would also strengthen our left flank as the Greens rise in the polls.

There are no perfect options. But when the Chancellor weighs her options before the budget, she should look closely at the luxury levy – a tax which raises significant revenue, targets the wealthiest, focuses on consumption which doesn’t enhance societal wellbeing and has significant political benefits against rivals on both our right and our left.

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