Today, Liz Truss and Kwasi Kwarteng made the first major U-turn in their government. The chancellor confirmed this morning that he will not be abolishing the top income-tax rate of 45p as he promised in his Budget two weeks ago.
The additional rate of income tax is paid by workers earning over £150,000 a year, and Kwarteng believed that by cancelling the top tax rate, he would be able to stimulate economic growth.
However, dozens of Tory MPs made it clear over the past week that they will not back the proposal, arguing it was unfair to be cutting taxes for the wealthiest in society amid the cost of living crisis. Even some of the highest profile members of the party, such as Michael Gove and Grant Shapps, publicly criticised the move.
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“We get it and we have listened”, tweeted Kwarteng. “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.”
Removal of the top tax rate: how will it affect your finances?
While the U-turn on the top tax rate might not directly affect most taxpayers, it may have significant indirect effects on people’s personal finances.
When the chancellor announced the tax cut in his mini-Budget on 23 September, the financial markets panicked. The value of sterling slumped and gilt yields jumped as investors digested the impact the cuts will have on the public finances.
Markets also began to price in much more aggressive interest rate hikes from the Bank of England. At one point, markets were predicting rates hitting 6% or more next year.
The turmoil in the markets caused mortgage lenders to panic. Hundreds of mortgage deals were pulled in the days after the chancellor’s announcement on the top tax rate as lenders retreated to re-price their offers based on future interest rates. This sudden re-pricing of risk sent shockwaves throughout the housing market.
Even though most taxpayers will benefit from Kwarteng’s other giveaways, notably the reversal of the National Insurance increase his predecessor Rishi Sunak bought in earlier in 2022, and a potential cut in the basic rate of income tax from 20p to 19p (although I wouldn’t rule out another U-turn at this stage) rising interest rates will hit borrowers.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said, “The Truss tax U-turn was more about politics than personal finances. It doesn’t save enough cash to make a material difference to the government finances. It means those on the lowest incomes will still be paying a huge price for tax cuts.”
Interest rate projections have fallen back after the U-turn on the top tax rate. However, markets are still pricing in rates of 5% or more by next year.
Guy Foster, chief strategist at wealth manager RBC Brewin Dolphin, said, “The pound and gilts have reacted well to the U-turn on plans to scrap the 45p tax rate. The derivatives market is now signalling one less rate increase since this U-turn on additional rate tax. The move is symbolic more than fundamental with the tax cut making up around £2bn of about £40bn per year increase in funding requirement announced at the mini-budget.”
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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