Written by Ray Coman
The government has succumb to external pressure to reverse two of its main tax cuts. The rate of corporation tax will not be cut as previously announced. The top rate of income tax will not reduce in April 2023, but remain at 45%.
Truss was keen mark her new premiership with a strong change of direction on fiscal policy. The Growth Plan 2022 would be driven by reducing tax. Shortly after taking office, Liz Truss and the then Chancellor kwasi kwarteng set out the dramatic tax cuts on 23 September 2022. Announcements of tax policy with such far reaching impact are typically reserved for a Budget. The resultant ‘mini-Budget’ therefore sidestepped the requirement for tax decisions to be run passed the Office for Budgetary Responsibility to check for sustainability.
Lack of account for how tax cuts worth £45 billion were to be fund caused the market to expect a flood of uk government debt for sale. The ensuing price collapse led the Bank of England to step in with purchases. However, the emergency measure -itself an alarm signal- to hold up demand was insufficient barrier and price continues to chart downwards. By way of example, 1½% UK Treasury Gilt 2047, trading about 113 in December last year is now below half its value at 51.78.
The tax cuts were at odds with Bank of England attempts to quell inflation through rate rises. The new government’s lack of coordination with global monetary policy rocked confidence in UK Plc. The pound has tumbled to historic lows, trading about par with the US dollar.
With criticism mounting against the government, it was forced to send back plans to scrap the top rate of tax. However, this was still not enough to bring the markets into stability and after only 38 days in office Kwasi Kwarteng was replaced as Chancellor of the Exchequer with Jeremy Hunt.
With his first major policy, Mr Hunt changed corporation tax rate to 25%. Businesses with a profit below £250,000 will not pay the full rate. The corporation tax rate for companies with a profit below £50,000 will remain at 19%. The rate of tax on profits between 50 and 250 thousand will gradually increase on a sliding scale. Mr Hunt also put on the shelf the plan to reduce the basic rate of tax from 19% to 20% from next April.
As part of a reversal broadcast on 3rd October, the additional rate income tax will also be restored to 45%. Its abolition would have meant no increase in the rate paid by taxpayers with an income over £150,000.
The Treasury has published estimates of additional revenues raised through the u-turn on tax cuts. However, such forecasts are loose about factoring the attractiveness of Britain as a place for doing business, and the incentive for taxpayers to work their income above the additional rate.