UK scraps tax cut for wealthy

October 4, 2022

In a policy reversal, the UK Prime Minister has scrapped the tax cut for the wealthy. This controversial tax cut had notably sparked market turmoil and caused the Pound to plunge to record low values.

Key facts

On September 23, the UK Finance Minister released a mini-budget (not an official budget) containing 23 announcements, including 45 billion Pounds in tax cuts.
This new ‘growth plan’, funded by large government borrowings, sought to kick-start economy growth which has been stagnating for years now.
Some of the measures include a cut in basic rate of IT to 19% (from 20%), scrapping of the health and social care levy, cancellation of the corporation tax hike, taxation of property transactions, etc.
One of the most notable features of this stimulus package was a plan to cut the top 45% rate of income tax, paid on incomes of over 150,000 Pounds/ year (i.e. 167,000 USD). This would account for 2 billion Pounds out of the 45 billion Pounds.
An additional rate of 50% was introduced in 2010 for individuals earning more than 150,000 Pounds/ year. This was cut to 45% in 2013.
Over the years, the number of people paying this additional rate has increased from 200,000 (in 2010) to 600,000 as the number of people earning incomes above the threshold has increased.
However, the plan to cut the top tax rate had led to an investor confidence crisis, market turmoil and sent the value of the Pound and government bond prices plummeting.
The situation worsened to such an extent that the Bank of England had to intervene a $73 billion program (i.e. 65 billion pound) to prop up the market.
Following this, the bank is expected to increase the interest rate. This has triggered mortgage lenders to take back their cheaper deals, leading to a turmoil among the homebuyers.
Despite the many negative fallouts, the government had stuck to its policy decision. However, following increased opposition from several senior legislators, the government has planned to withdraw the tax cut for the wealthy.
Notably, according to OECD data, Britain’s tax burden is lower than that of several other European nations like France and Germany.

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