Government U-turns on top rate tax cut

Controversial cut to the additional rate of income tax is abandoned


The government has scrapped its plans to abolish the 45% additional rate of income tax, less than two weeks after the measure was announced.


The additional rate sees earnings over £150,000 taxed at 45%. Its abolition was one of a raft of tax cuts announced by the Chancellor, Kwasi Kwarteng, during the government’s emergency budget on the 23rd September.


The move was positioned as a simplification of the tax system. During the mini-budget statement, the Chancellor suggested that it would lead to “one of the most progressive and competitive tax systems in the world”.


However, the government faced strong opposition to the measure and has subsequently backtracked by reinstating the additional rate.


What does the move mean for contractors?


The government U-turn means that individuals earning over £150,000 have any earnings over that threshold taxed at 45%.


While the additional rate remains in place, the one percent cut to the basic rate will go ahead as planned. This will see basic rate of income tax cut from 20% to 19% and will come into effect from 6th April 2023 – the start of the 2023/24 tax year.


Contractors residing in Scotland were unaffected by the temporary change, as Scotland operates its own separate set of tax bands.


“Detached from reality”


Certain aspects of the emergency budget were heavily criticised, both by members of the opposition party as well as Conservative MPs and the wider public.


The Shadow Chancellor, Rachel Reeves, accused the government of being “detached from reality”, and the financial markets also reacted negatively to the move.


In a little over a week, the pound fell to its lowest ever level against the dollar, while interest rates spiked and mortgage providers withdrew their products. The Bank of England was forced to intervene, buying government bonds to stabilise the markets after a tumultuous week.


Despite this, the mini budget overall was seen as broadly progressive for businesses. It cancelled a planned increase to Corporation Tax – which remains at 19% rather than 25% – and reversed the increase to National Insurance introduced earlier in the year.


More importantly, the budget also saw the repeal of the controversial IR35 reform – a move that was widely welcomed by industry experts. Andy Chamberlain, Policy Director at IPSE, called the move “a watershed moment” and “a dramatic shift in government thinking” that would benefit contractors across the UK.


Markets bounce back as top tax rate reinstated


In comparison to the initial reaction, the markets have responded positively to the government’s U-turn, and key business bodies have welcomed the development.


Speaking to BBC Radio 4 on Monday, Tony Danker – Director-General of the CBI – called the abolition of the additional rate tax “a distraction” from the “strong economic reforms that businesses have been waiting for, for years”.


“Businesses up and down the country want the markets to stabilise, that is an absolute precondition to investment and growth”, he added, concluding that the reversal was “a good development”.


Martin McTague, National Chair of the Federation of Small Businesses (FSB), welcomed the government’s commitment to “scrapping changes to IR35 rules, [and] cancelling a planned rise in Corporation Tax”, but warned that “many headwinds remain, not least inflation and rising interest rates”.

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