Government U-turns on scrapping 45p rate of income tax
A statement on Twitter this morning by Kwasi Kwarteng stated that the abolition of the 45p tax rate “has become a distraction” from the government’s “overriding mission to tackle the challenges facing our country”.
As a result, the government will not proceed with this measure as it looks to “focus on delivering the major parts of our growth package”, Kwarteng wrote.
The major U-turn comes just 10 days after Kwarteng’s mini Budget where he announced the additional rate of tax – 45% on those earning £150,000 or more – would be abolished from April 2023.
It was expected to benefit just 1% of the population at a cost of £2bn to the Exchequer. It would also allow the wealthiest to earn £500 of savings interest for the first time under the Personal Savings Allowance.
In its place would be a single higher rate of income tax at 40% (currently applied to those earning between £50,271 and £150,000).
At the time, Budget documents suggested removing the UK’s top rate of tax was a design to “attract the best and the brightest to the UK workforce, helping businesses innovate and grow”.
However, following the mini Budget’s stealth tax cut announcements – £45bn spending via debt – it sent markets into meltdown as the pound plunged to a record low against the dollar, lenders removed their products amid forecasts the base rate would hit 6%, and the Bank of England was forced to step in and buy bonds to stabilise the market and prevent a Northern Rock-style run on pensions.
Debates over the weekend during the Conservative party conference questioned whether the government would be forced to U-turn on any of the measures announced, following a series of media interviews with Prime Minister Liz Truss last week.
And this morning Kwarteng reinforced that “we get it, and we have listened”.
Rachael Griffin, tax and financial planning expert at Quilter, said: “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 Robin Hood narrative by giving to the rich and taking from the poor.
“However, it is really the market reaction that has spooked the new government as the pound got hammered and gilt yields spiked. Borrowing became more expensive and the Bank of England signalled it will have to go much higher on interest rates to defend the currency.”
Griffin added that the line from government that its fiscal policies will “culminate to stimulate economic growth” hasn’t proved to be convincing enough, “crucially even within their own party with outspoken heavyweights like Michael Gove critical of the policy”.
She said: “The market reaction means it was hard to see the move as pro-business either, with the concern that consumers may simply bank the savings rather than spend and invest amid the global economic uncertainty.
“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.”