Chancellor scraps 45p income tax change in ‘embarrassing’ U-turn

Chancellor scraps 45p income tax change in ‘embarrassing’ U-turn
Chancellor of the Exchequer Kwasi Kwarteng attends Britain's Conservative Party's annual conference in Birmingham, Britain, October 3, 2022. REUTERS/Hannah McKay

The government has reversed the scrapping of the 45p income tax rate after ructions in financial markets and rebellion by some Tory MPs.

In a statement this morning (October 3), chancellor Kwasi Kwarteng said it was clear that the abolition of the tax rate has become a distraction.

“We get it, and we have listened,” he said, despite prime minister Liz Truss insisting on Sunday that the plan would go ahead.

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The prime minster and chancellor were warned by Tory MPs, including former cabinet ministers Michael Gove and Grant Schapps, that the plan was wrong and would not win a Commons vote.

The plans to get rid of the tax were announced in the “mini” Budget last month.

The additional rate of income tax, which is 45 per cent on income over £150,000, was to be scrapped completely from April 23, 2023.

This meant there would have been a single higher rate of income tax of 40 per cent.

However, the news caused significant fluctuations in financial markets, as there was concern that most of the measures introduced would be funded by £45bn in borrowing.

The pound crashed, hitting $1.035 against the dollar, and gilts soared, prompting the Bank of England to intervene, warning about a “material risk to UK financial stability”. 

Rachael Griffin, tax and financial planning expert at Quilter said scrapping the top rate of income tax would have benefitted too few.

“The optics looked difficult from the start, as scrapping the top rate was seen by many in the general public as some sort of reverse of the Robinhood narrative by giving to the rich and taking from the poor. 

“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.”

The pound rose briefly this morning, jumping 1 per cent after the news began to break.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown said: “A big part of the questionable battle plan to try and stimulate growth is being ripped up, which may actually help calm the feverish rise in borrowing costs for companies, homeowners and the government. 

“But the credibility of the government in providing a steady hand on the tiller at a time of such economic uncertainty has been lost, perhaps irrecoverably.”