U.K. government cancels plan to cut tax on high earners in significant U-turn

October 4, 2022: -On Monday, the U.K. government reversed a plan to scrap the top income tax rate after a public backlash and significant market turbulence.

The recent government had announced a swathe of tax cuts just weeks into its tenure, but financial markets poorly received them. Taking the top tax rate on incomes over £150,000 from 45% to 40% was witnessed as particularly politically toxic as Brits dealt with a cost-of-living crisis.

In the days after their announcement, the pound came down to an all-time low, mortgage deals were taken out from the market, and U.K. government bonds started to sell off at a historic rate, causing the Bank of England to start a temporary purchase program to calm volatility.

On Monday, Finance Minister Kwasi Kwarteng confirms that the government will scrap its plans to cut taxes for the highest earners in the country.

“It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges which face our economy,” Kwarteng said.

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

On Monday, the British pound increased on reports that the U.K. government was announcing a U-turn. Sterling was 0.8% surged against the dollar at one stage but came down to $1.1212 by 7:30 a.m. London time after the news was confirmed.

Jane Foley, the senior F.X. strategist at Dutch bank Rabobank, said: “Although U.K. assets are reacting well to the U-turn, they are far from being out of the woods.”

The Bank of England came into the U.K.’s bond market last week, suspending the planned start of its gilt selling and temporarily buying long-dated bonds.

Gilts are U.K. government bonds. Ten-year gilt yields the interest rate paid on bonds, which moves inversely to prices that increased at a record rate in September, which affects the instability in pension funds and mortgage issuances.