“It is clear that the abolition of the 45p tax rate has become a distraction from our primary mission of addressing the challenges facing our economy,” Finance Minister Kwasi Kwarteng said in a statement.
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LONDON – The UK government on Monday reversed a plan to scrap the top rate of income tax, after a public backlash and major market turmoil.
The new government had announced a series of tax cuts within weeks of taking office, but they were poorly received by the financial markets. Raising the top rate of tax paid on income above £150,000 ($166,770) from 45% to 40% was seen as particularly politically toxic as Britons face a cost-of-living crisis.
In the days following its announcement, the pound fell to a record low, mortgage offers were withdrawn from the market and UK government bonds began selling at a record pace, prompting the Bank of ‘England started a temporary buying program for calm volatility.
On Monday, Finance Minister Kwasi Kwarteng confirmed that the government would abandon plans to cut taxes for the country’s highest earners.
“It is clear that the abolition of the 45p tax rate has become a distraction from our primary mission of addressing the challenges facing our economy,” Kwarteng said in a statement.
“As a result, I am announcing that we are not moving forward with the abolition of the 45p tax rate. We understand that and we have heard it.”
Pound jumps briefly
The British pound rose sharply on Monday morning on reports that the UK government was set to announce a U-turn. Sterling was up 0.8% against the dollar at one stage, but fell to 1 .1212 dollars at 7:30 a.m. London time after confirmation of the news.
With the ruling Conservative Party sinking in opinion polls since its so-called “mini budget”, which was also criticized by the International Monetary Fund in a strange move, several of its own politicians have spoken out against the proposals.
Big U-turn
Grant Shapps, the former transport secretary, said in an interview with the BBC on Monday morning that the reversal of the top rate tax cut was a “sensible response” because a tax cut for ” the people who need them the least… that way was unsustainable.”
It represents a significant and humiliating U-turn for new Prime Minister Liz Truss, who as recently as Sunday was “absolutely committed” to the cut.
He also revealed that the plan was instigated by Kwarteng and had not been announced to his entire cabinet. It would have provided an average annual benefit of £10,000 to the country’s 660,000 high earners, the Treasury said.
Truss said in a tweet on Monday: “Abolishing the 45% rate had become a distraction from our mission to get Britain moving.”
“Our focus now is to build a high-growth economy that funds world-class public services, raises wages and creates opportunity across the country.”
