Chancellor scraps plans to abolish 45p rate of income tax
by Richard Hattersley – Editior, AccountingWEB
Chancellor Kwasi Kwarteng has performed a U-turn on the abolition of the 45p rate of income tax following pushback from Conservative MPs, the opposition and market instability.
Ahead of his speech at the Conservative Party conference this morning, Kwarteng announced that he’s not going to proceed with the scrapping of the 45p rate of income tax, calling the reaction a “huge distraction”.
Kwarteng’s reversal comes after the pound plummeted in reaction of his uncosted mini-Budget and the Bank of England was forced to step in to calm the bond markets.
The measure had proved unpopular with a growing number of Conservative MPs, with former government minister Michael Gove calling the tax cut as “unconservative” and was “wrong” on BBC’s Sunday with Laura Kuenssberg.
‘A distraction’
Confirming the U-turn in a statement entitled ‘We get it’, Kwarteng said: “It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country,” wrote Kwarteng.
Reacting to the Chancellor U-turn, shadow Chancellor Rachel Reeves said: “The PM has been forced to abandon her unfunded tax cut for the richest 1%. But it comes too late for the families who will pay higher mortgages and higher prices for years. The Tories have destroyed their economic credibility and damaged trust in the British economy.”
Truss committed to the plans 24 hours ago
Despite the drumbeat of discontent over the tax cut for the highest earners, the U-turn is still a surprise as only yesterday Prime Minister Liz Truss expressed her steadfast commitment to scrapping the top rate of income tax on the BBC programme. When quizzed by Kuenssberg, Truss said the measure was “part of an overall package of making our tax system lower and fairer.”
Only a month into the role as Chancellor, Kwarteng was set to tell Conservative members at today’s party conference that “We must stay the course. I am confident our plan is the right one.”
There was fear within the government that the government wouldn’t be able to get the measure through Parliament with pushback coming not just from the opposition but from at least 13 Conservative MPs.
The cut of the 45p rate of income tax would cost £2bn a year, but as former tax lawyer Dan Neidle pointed out on Twitter, the other mini Budget tax cuts could be more costly, such as corporation tax which costs £17bn.
Unpopular measure
The Chancellor has had a tumultuous couple of weeks since the mini-Budget. Days after the Budget the pound fell to a record low against the pound, while calls are instensifying for the government to publish the Office of Budget Responsibility forecasts as soon as possible rather than sitting on them until the medium-term fiscal plan announcement in late November.
The abolition of the 45p rate of income tax will be filed away as another post-Budget U-turn with George Osborne’s pasty tax and Philip Hammond’s changes to Class 4 national insurance.
