Chancellor Kwasi Kwarteng has backed down on his proposal to scrap the 45% income tax for those earning over £150,000, just 10 days after first announcing the policy as part of his mini budget.
Kwarteng (pictured) had been put under pressure to reverse the proposal by Conservative MPs, while the IMF also criticised the plans to cut income tax for highest earners during a cost-of-living crisis.
In a statement, Kwarteng said: “It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle challenges facing our economy. As a result, I am announcing that we are not proceeding with the abolition of the 45p tax rate. This will allow us to focus on delivering the major parts of our growth package.”
The mini budget, announced on 23 September, caused a major sell off of gilts which prompted emergency action from the Bank of England.
The “fiscal event” also led S&P to downgrade the nation’s outlook from stable to negative due to “additional risks” in lending to the UK.
Victoria Scholar, head of investment at Interactive Investor, said: “[Kwarteng’s U-turn] comes after a growing number of Conservative MPs expressed concerns over the tax plans with fears from the Truss administration that the proposal would fail to get sufficient support in the House of Commons.
“The dysfunction in the bond market has forced the Bank of England to carry out conflicting policies; one to stem inflation and another to avoid financial contagion. It is having to buy long-dated gilts to prop up its sovereign bonds and the pound. Meanwhile it is likely to carry out a jumbo 100bps hike next month as it looks to rein in economic activity to stem inflation. This push and pull underscores the UK market’s disorder at the moment,” Scholar added.
Following the U-turn, the pound rose to pre-mini budget levels, reaching $1.13 overnight. It had tumbled to a record low of $1.03 following the initial budget announcement.
Rachael Griffin, tax and financial planning expert at Quilter, said: “This is an embarrassing U-turn for the government and only time will tell if this has damaged the reputation of both Truss and Kwarteng irreparably.
“Interest rate rises were already going to spell huge pain for the public, but the announcements like the scrapping of the top rate of tax only served to potentially push them higher and it was key that the government tried to distance themselves from their action causing this reaction. Kwarteng must do a better job of instilling confidence and giving people certainty around the tax rules so they can plan efficiently at the November budget.”