Chancellor Jeremy Hunt has confirmed a suite of U-turns on tax cuts announced less than a month ago by his predecessor, including the reversal of a cut to the basic rate of income tax.
The basic rate of income tax will remain at 20 per cent “until economic conditions allow for it to be cut”, the Treasury said in a press briefing today (October 17).
In his "mini" Budget last month, former chancellor Kwasi Kwarteng - who was sacked last week - had promised the basic rate of income tax would fall from 20 per cent to 19 per cent on income between £12,571 and £50,270 from April 2023.
The government said this cut would have cost around £6bn.
The scrapping of the basic rate cut follows Kwarteng’s earlier decision not to proceed with the removal of the additional 45p rate of income tax, also previously due to be removed in April next year.
What people would have saved prior to 1% income tax U-turn
Earnings | 1% Basic rate cut saving per annum (scrapped) | 1.25% NI saving per annum (remains) | Total per annum pre IT u-turn |
|---|---|---|---|
£20,000 | £74.30 | £92.88 | £167.18 |
£30,000 | £174.30 | £217.88 | £392.18 |
£40,000 | £274.30 | £342.88 | £617.18 |
£50,000 | £374.30 | £467.88 | £842.18 |
£60,000 | £377.00 | £592.88 | £969.88 |
£70,000 | £377.00 | £717.88 | £1,094.88 |
£80,000 | £377.00 | £842.88 | £1,219.88 |
£90,000 | £377.00 | £967.88 | £1,344.88 |
£100,000 | £377.00 | £1,092.88 | £1,469.88 |
Source: Quilter
Tax and financial planning expert at Quilter, Rachael Griffin, said the latest U-turn on a “policy-that-never-was” was an effort by Hunt to balance the books.
"The amount of income tax paid by UK taxpayers has almost doubled in the last 20 years, from £324.7 billion in 2002-03 to £633.4bn in the tax year 2019-20, with the number of additional-rate taxpayers rising the fastest,” Griffin explained.
“The 1% cut to basic rate income tax was first announced by Rishi Sunak, then brought forward by Kwarteng and has now been put on ice by Hunt indefinitely.
“Had the cut come into place in April 2023, an average UK earner on £30,000 a year would have paid £174 less in tax next year. However, they will still benefit from Kwarteng’s abolition of the 1.25 percentage point increase to national insurance which Hunt has kept in place, saving them around £218 next year.
“A higher earner on an annual salary of £100,000 will now pay £377 more in income next tax year, while benefiting by more than £1,000 from Kwarteng’s previous national insurance hike reversal.”
Other changes
The government has also gone back on cuts to dividend tax, corporation tax and alcohol duty rates, and changes to IR35 reforms. It has, however, kept permanent cuts made to stamp duty tax and kept the government’s reversal of the National Insurance increase.
Since Kwarteng’s sweep of unfunded tax cuts were announced, mortgage interest rates have shot up and gilt market movements pushed some pension schemes to the brink of insolvency. Mortgage rates have climbed 1.73 percentage points since the "mini" Budget.
Following an emergency bond buying programme by the Bank of England to calm the markets, there have been calls for the tax cuts announced by Kwarteng to be reversed to bring more stability to the UK.
“No government can control markets, but every government can give certainty about sustainability of public finances,” said Hunt today.
“And that is one of many factors that influence how markets behave.”
ruby.hinchliffe@ft.com
