The former Labour peer lost his role in September 2025 over his relationship with the convicted sex offender.
Speaking to LBC’s Lewis Goodall, Pensions Secretary Pat McFadden called on the disgraced former peer to hand back the cash as he denied Sir Keir Starmer has lost the confidence of Labour MPs.
It comes as the latest release of the so-called Epstein Files by the US government detailed Mandelson’s relationship with the convicted sex offender, including email exchanges about fiscal policy during the 2008 financial crash.
A police investigation was initiated in the UK following the release, and on Friday, police searched two homes linked to Mandelson.
When pressed on whether Mandelson should pay back the cash, which could be as much as £55,000, he was handed after being sacked as US ambassador, Mr McFadden said: “I think he probably should, yeah.”
Mr McFadden rejected suggestions Sir Keir Starmer is considering resignation over this latest scandal and denied claims he has lost the support of his own MPs.
He told Lewis: “He was elected on a five-year mandate just 18 months ago.
“This was obviously the wrong appointment, but I think the Prime Minister has acted in good faith and I think he wants to do the right thing.
“I also think it's bad for the country to be changing prime minister every 18 months, every two years, as though that's the answer to our problems.
“I think the country needs continuity in its leadership and it needs somebody to stay in post for a while, to actually do the job for a period of years.”
He added: “I don't think he's lost the confidence of the House.
“I think everybody in the House wanted to disclose the material to do with this.
“There's no advantage to anyone in keeping anything hidden.”
Mr McFadden agreed with Sir Keir and former PM Gordon Brown that Mandelson has “betrayed his country.”
“I think it was a betrayal,” he said.
“And I understand Gordon's anger because he took the decision to bring Peter Mandelson back from Brussels, probably for some of the same reasons as Keir Starmer took the decision to appoint him as ambassador.
“Gordon will feel a sense of betrayal, of anger, of regret that he did that.”
The total sum Mandelson was paid last September could be as high as £55,000 before tax and deductions, according to a report by the Sunday Times.
Full details about Mandelson’s payoff will be revealed to Parliament after MPs backed a call for disclosure of papers relating to his time in the Government.
The Sunday Times suggested the figure could be between £38,750 and £55,000, based on Mandelson being paid at the highest rate in the diplomatic service, an annual salary of between £155,000 and £220,000, and qualifying for a three-month payoff.
A No 10 source told the Press Association: “Given what we know now, Mandelson should either pay the money back or give it to a charity to support victims.”
Earlier this week, health secretary Wes Streeting, who was friendly with Mandelson before his downfall, said the disgraced ex-Labour peer should “certainly” hand back the money.
A Foreign Office spokesman said: “Peter Mandelson’s civil service employment was terminated in September 2025 in accordance with legal advice and the terms and conditions of his employment. As we have consistently said to Parliament, normal civil service HR processes were followed.
“Further information will be provided to Parliament as part of the Government response to the motion passed last week which is being co-ordinated by Cabinet Office. A review has been instigated in light of further information that has now been revealed and the ongoing police investigation.”
The Metropolitan Police said its investigation into Mandelson over alleged misconduct in public office would “take some time” after officers finished searching his homes in London and Wiltshire.
“This will be a complex investigation requiring a significant amount of further evidence gathering and analysis,” Metropolitan Police Deputy Assistant Commissioner Hayley Sewart said.
Meanwhile, Lucy Powell, Deputy Labour Leader, believes the scandal could impact the Gorton and Denton by-election.
She told the Independent: “I imagine Mandelson will come up in some parts of the constituency. More than others for those who more closely follow the news.
“All I’d say is that prime ministers have to make judgment calls all day long and all the time, and sometimes they get them wrong. I think the Prime Minister put his hands up about that.”
