Government U-turn on 45p tax rate abolition

interactive investor experts on what it could mean for personal finances.

Commenting, Alice Guy, Personal Finance Editor, interactive investor, says: “With the Conservative conference this week, and the Downing Street chairs barely warm, the new government has chosen red faces over continuing pain.

“The initial surprise tax reduction spooked the market and confidence is still shaken – lesson number one is the need to be open and transparent about the numbers behind the plans to stabilise the UK economy.”

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Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “There always seemed like two choices: reverse course or keep pushing against the tidal wave of condemnation. The government chose the former. Whether the move will be a panacea to the market turmoil remains to be seen.

“The hope is the volte-face will steady the ship. Homeowners and wannabe buyers will hope for a reprieve in the mortgage marketplace, which has seen a number of lenders shut up shop for new customers, with many more hiking rates on deals.

“What all this means for personal finances is unclear – but much still remains uncertain for all of us. However, it remains important to take steps today to bolster financial resilience now to give you some peace of mind whatever the future may hold. If you are able to keep regular investment contributions going, you might thank yourself later – even if that means reducing, rather than stopping, regular investments.”

Victoria Scholar, Head of Investment, interactive investor says, “The UK government has staged a U-turn on its plans to scrap the 45p rate of income tax. Chancellor Kwasi Kwarteng has confirmed the abolition of the top rate of tax paid by those earnings over £150,000 will no longer be carried out. It comes after a growing number of Conservative MPs expressed concerns over the tax plans with fears from the Truss administration that the proposal would fail to get sufficient support in the House of Commons. 

“Sterling is moving higher but has pared back its more convincing gains from earlier in the session, trading modestly in the green against the dollar, euro and Japanese yen. The pound has been staging gains after hitting a record low last week following Kwarteng’s mini-budget announcement. Despite attempting to regain ground in recent sessions, cable (GBP/USD) is still down by more than 17% since the start of the year, causing pain for UK importers and adding to Britain’s inflationary conundrum.  

“The chancellor’s mini-budget sparked a major sell-off in the UK gilt market last week, prompting emergency intervention from the Bank of England. The dysfunction in the bond market has forced the Bank of England to carry out conflicting policies; one to stem inflation and another to avoid financial contagion. It is having to buy long-dated gilts to prop up its sovereign bonds and the pound. Meanwhile, it is likely to carry out a jumbo 100 basis point hike next month as it looks to rein in economic activity to stem inflation. This push and pull underscores the UK market’s disorder at the moment.

“Meanwhile, on Friday, ratings agency Standard & Poor’s cut Britain’s sovereign debt rating from ‘stable’ to ‘negative’ and said it expects the UK to enter a technical recession in the coming quarters, shrinking by 0.5% in 2023.”