The removal of the 45p additional rate of tax unveiled in the mini-budget will no longer go ahead, the government has announced.
The decision to cut the top rate proved highly controversial, with widespread criticism that it would benefit only the UK’s highest earners at a time when those on lower incomes are really struggling.
Rachael Griffin, tax and financial planning expert at Quilter, said: “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.”
The u-turn will add back around £2 billion to the government’s coffers, although other tax cuts announced in the budget including the 1p cut in basic rate income tax, and the National Insurance and stamp duty reductions are set to cost £45 billion. Learn more about the changes announced in the mini budget in our guide Mini-budget 2022: what does it mean for you?
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’s finances. It means those on the lowest incomes will still be paying a huge price for tax cuts.”
What effect will the u-turn have?
It is hoped that the u-turn will take a bit of pressure off the pound, which fell sharply after the mini budget was announced. You can find out more about this in our article How does the falling pound affect me?
However, there are worries that benefits may be cut by the government in coming weeks as it attempts to prove it is in control of spending.
Philip Dragoumis, owner of wealth manager, Thera Wealth Management said: “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.”
Economic and political uncertainty can be extremely worrying, especially when so many people are already finding it difficult to make ends meet during the current cost of living crisis. If you’re struggling, our articles How to save money – 19 best money saving tips, The energy bills crisis: what can you do about soaring costs? and 18 ways to save money on your food bills may help.