Kwasi Kwarteng announces income tax cut U-Turn – who is affected

Mini-Budget: Kwarteng announces cut to basic rate income tax

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Kwasi Kwarteng today said “we get it, and we have listened” as he climbed down on plans to cut the 45p tax rate. The plan to scrap the 45p rate had been criticised as unfair during the rising cost of living. 

The 45p rate of income tax is paid by people earning over £150,00 per year.

Everyone has a Personal Allowance, meaning earnings up to £12,570 are not subject to tax.

The basic rate means taxable income between £12,571 to £50,270 has a rate of 20 percent – although this will decrease next year to 19 percent.

The higher rate is 40 percent on taxable income between £50,271 to £150,000.

Over £150,000 the additional rate is 45 percent. 

Commenting on the u-turn, Rachael Griffin, tax and financial planning expert at Quilter, said: “Scrapping the top rate of income tax would have benefited the few – around one percent – who are very well paid and would have cost the exchequer around £2billion.

“The optics looked difficult from the start, as scrapping the top rate was seen by many in the general public as some sort of reverse of the Robinhood narrative by giving to the rich and taking from the poor. 

“However it is really the market reaction that has spooked the new Government as the pound is got hammered and gilt yields spiked. 

“Borrowing became more expensive and the Bank of England signalled it will have to go much higher on interest rates to defend the currency.”

“This is an embarrassing U-turn for the Government and only time will tell if this has damaged the reputation of both Truss and Kwarteng irreparably. 

“Interest rate rises were already going to spell huge pain for the public, but the announcements like the scrapping of the top rate of tax only served to potentially push them higher and it was key that the government tried to distance themselves from their action causing this reaction. 

“Kwarteng must do a better job of instilling confidence and giving people certainty around the tax rules so they can plan efficiently at the November budget.”

He added: “Tackling the UK’s cost of living crisis should be the Government’s top priority and it was hard to see how the abolition of the 45p tax rate would have benefitted anyone apart from the UK’s highest earners.”

Jamie Morrison, Head of Tax at HW Fisher, suggested the Chancellor’s “bold” move on the 45p rate has “not paid off”.

More to follow…

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