Government makes U-turn on 45p tax decision

The Government has made a U-turn on its decision to cut the 45p tax for higher earners.

The Chancellor, Kwasi Kwarteng, confirmed the decision this morning. He 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’s 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 were not proceeding with the abolition of the 45p tax break. We get it and we have listened.”

Since the Government confirmed that it planned to cut income tax for people earning more than £150,000 as part of the mini-Budget there has been uproar.

Current and former ministers, including former-Housing Secretary Michael Gove, have hit out at the Government for cutting taxes for the highest earners at a time when millions of people are seeing their family finances squeezed.

Former Housing Minister Grant Shapps blasted the as “politically tin-eared”.

Since the news emerged that the Government was reversing its decision the Pound has returned to the same level that it was at before the mini-Budget (as of 07:30).

Reaction

Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management:

“The additional rate tax cut was politically toxic so it seems a U-turn was inevitable. The intent to rein in the fiscal largesse will be welcomed by markets. Sterling is stronger but bonds remain weak.

“However, there is a substantial ongoing deficit to fund. And if, as rumoured over the weekend, this is likely to be financed by cuts in spending and benefits then another showdown looms.

“Confidence is still lacking in this government and there is a “cliff edge“ in a couple of weeks when the Bank of England’s emergency bond buying programme comes to an end.”

Nick Lincoln, director at Watford-based Values to Vision Financial Planning:

“Above all, this U-turn signals to the world that we are governed by people with no spine. The irony is that the markets were not spooked by the income tax fiddling.

“They were spooked by high inflation and the enormous energy bill supports, and on that front nothing has changed. It’s a symbolic move but one that will likely do nothing to counteract the pressure on Sterling.”

Adrian Kidd, chartered wealth manager at Aylesbury-based EQ Financial Planning: 

“The pressure cooker got too hot, and it was nice to see the Chancellor’s friend, Liz Truss, throwing him under the bus by saying it was all his idea. That highlights more issues within Government than we already thought.

“The next question is, which other policies now go the place where they belong, namely the scrapheap? Maybe the OBR gave a hint last week in that meeting that if you scrap X, Y and Z then you might just get away with it.”

Alex Shairp, founder at Glasgow-based Blackmount Private Wealth:

“Politicians attract ridicule for changing their mind on important matters. In this case, I can understand why. The Government clearly believes in this policy but has succumbed to political pressures.

“Reversing the abolition of the 45% rate now only adds to the chaos and uncertainty. Financial and currency markets reacted as they did to the mini-Budget because it was unsubstantiated. They lost confidence. A flip flop doesn’t restore confidence.”

Mark Williams, CEO of the London-based IT company, Pensar:

“This is simply Kwarteng trying to save his own political skin. And it’ll do nothing but sew more uncertainty in the markets. This guy and his boss are complete buffoons and need to stand down.”

Lewis Shaw, founder of Mansfield-based Shaw Financial Services:

“The Chancellor says he has listened and decided to U-turn. They still don’t get it. They should never have even attempted this policy in the manner they did. This is, at its heart, not a policy issue, it’s a credibility issue.

“Either they did know what would happen to financial markets but didn’t care until it became too politically toxic, or they didn’t know what would happen, proving they’re economically illiterate.

“Either way, their reputation is in tatters, market confidence has packed its bags and got on a plane and mortgages are shot to bits. If I caused half as much carnage in any business in less than a week, I’d be given my marching orders, and rightly so.”

Riz Malik, director of Southend-on-Sea-based R3 Mortgages: 

“This is welcome news and almost certainly the right decision. However, the OBR’s response to the mini-Budget needs to happen as soon as possible to potentially undo some of the damage that was done last week.

“Even if the markets respond well, I fear mortgage lenders may take some time to reflect positive news in their pricing. We may see further U-turns at this rate.”

Gaurav Shukla, mortgage adviser at London-based broker, Home Me:

“It was only a matter of time before Kwasi Kwarteng retracted some of the outrageous policies announced at the mini-Budget. He needs to reinject confidence in the Pound and ease the uncertainty in the financial markets. The biggest question here is, is he the right Chancellor to take us forward, and will Liz Truss continue to defend him?”

Sam Alsop-Hall, Chief Strategy Officer at Birmingham-based healthcare and NHS recruiter, Woodrow Mercer Healthcare:

“We need a government that makes decisions and sticks to them. Instead we appear to have a headless chicken.

“A U-turn will simply fuel the already exceptional uncertainty in the economy, as what else are the Government prepared to U-turn on? For a government to U-turn so early in its tenure is nothing short of a calamity. No wonder there’s so much volatility in the currency markets.”

Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial: 

“I’m surprised that the Chancellor has listened considering he appears to be so profoundly deaf. Although I am no fan, I must credit him with performing a U-turn on clearly the most unpopular policy in the mini-Budget. There are lots of other unfunded tax pledges in this fiscal event, apart from the energy support, so we will see what markets thinks of this.”

John McCrea, blogger at Tales From Absurdia: 

“It was a bad idea from the start, but nothing spooks the markets like uncertainty. Policy made seemingly on the hoof isn’t a good look. I suspect this decision was made to prevent the embarrassment of senior Tories voting it down rather than benevolence.”