Government U-turns on plan to scrap 45p tax rate

So, the Government has backtracked on its plan to abolish the 45p top rate of income tax – just 10 days after the proposal was announced.

The U-turn came after widespread criticism of the measure, originally unveiled in the mini-budget last month. The plan would have seen the 45% higher rate – which is paid by people earning more than £150,000 a year – scrapped.

The 45p tax rate stays

In a statement on Twitter this week, Chancellor Kwasi Kwarteng confirmed he wouldn’t be going ahead with the tax cut.

Mr Kwarteng said: “From supporting British business to lowering the tax burden for the lowest paid, our Growth Plan sets out a new approach to build a more prosperous economy.

“However, 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.

“As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.

“This will allow us to focus on delivering the major parts of our growth package.”

The IFS responds to the 45p tax U-turn

The Institute for Fiscal Studies (IFS) said the direct impact of the U-turn was of “limited fiscal significance”.

IFS Director Paul Johnson said: “At a medium-run cost of around £2 billion a year, it represented only a small fraction of the Chancellor’s mini-Budget announcements. His £45 billion package of tax cuts has now become a £43 billion package – a rounding error in the context of the public finances.

“The Chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability. Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services. On the latter, the Chancellor has indicated that departments’ cash spending plans that run to 2024-25 will be left unchanged, which amounts to a real-terms cut in their generosity in the face of higher inflation. This will squeeze public services, but will not be enough to plug the fiscal hole the Chancellor has created for himself.”

Our reaction

Politicians often misjudge the feelings of the electorate, and this is a classic example.

There is a sound economic rationale for abolishing the 45% personal tax rate to attract more investors into the UK, which in turn increases the expenditure in the UK and consequently the overall tax take. But it’s very difficult for the person on the street to be able to understand this rationale when unable to pay for basic needs such as fuel and food.

So, it’s not surprising the Government has revoked the policy. They hadn’t considered it in the context of the times we’re living in – people’s instinct is the rich should be paying more, not less.

An amateur mistake on behalf of a new government. Let’s hope they learn from their mistakes, as uncertainty around the tax system isn’t what our economy needs right now – or ever.