Chancellor Jeremy Hunt has reversed the 1p cut in the basic rate of income tax announced by Kwasi Kwarteng last month, in the latest major U-turn on Liz Truss’s mini-Budget.
In a move saving £5bn a year, Mr Hunt announced that he was not only reversing the decision to bring the cut to 19p forward to 2023, but also ex-chancellor Rishi Sunak’s promise to introduce the cut in 2024.
The basic rate will remain at 20p “indefinitely” said Mr Hunt, in a statement abolishing almost all of the remaining tax changes from the disastrous September mini-Budget.
The only elements of Mr Kwarteng’s £45bn tax giveaway package to remain in place are the reversal of Mr Sunak’s 1.25 per cent hike in National Insurance, and the rise from £125,000 to £250,000 in the zero-rate threshold for stamp duty on property.
Ms Truss had already junked Mr Kwarteng’s decision to abolish the 45p top rate of income tax for high earners and restored Mr Sunak’s plan for a rise to 25p in corporation tax in 2023.
Mr Hunt said that he was also ditching cuts to dividend tax rates, a reversal of off-payroll working reforms and the new VAT-free shopping scheme for non-UK visitors. And duty rates on alcohol will not be frozen for a year as planned.
The new chancellor said today’s measures would raise £32bn a year for the Treasury. But experts say the black hole in the public finacnes could amount to £60bn.
Addressing the highly-sensitive decision to hold the basic rate of income tax at 20p, Mr Hunt said: “It is a deeply held conservative value – a value that I share – that people should keep more of the money they earn.”
“But at a time when markets are rightly demanding commitment to sustainable public finances. It is not right to borrow to fund this tax cut,” he added.
Mr Truss’s promise to keep Britons’ household energy bills under control for two years has also been ditched, with support only guaranteed until April 2023, Mr Hunt announced.
The new chancellor said the government would “review” the two-year cap on the unit price of energy to keep annual bills at no more than £2,500, suggesting the Treasury wanted to end universal support for all Britons after six months.
In a shock move aimed at reassuring markets the government can balance the books, Mr Hunt said he had find a “new approach” to energy bills that will “cost the taxpayer significantly less”.
Cutting the basic rate from 20p to 19p in the pound was first announced by Mr Sunak in his spring statement earlier this year. He said the change would be introduced by 2024.
But Mr Kwarteng brought the tax cut forward by 12 months and said it would take effect from April 2023. Around 31m people were set to save £170 on average from the 1p cut, and up to £377 for the highest earners.
As a result of Mr Hunt’s decision on income tax, a worker on £15,000 loses £24 a year, someone on £30,000 loses £174, and those over £50,000 loses £377.
However, top economists estimated the government is facing a £60bn black hole in the public finances. The Institute for Government (IfG) said there was no real “fat” to trim from public sector budgets, as fears of a new age of austerity grow.
In his televised statement, the chancellor warned of more “tough” spending decisions to come. “Governments cannot eliminate volatility in markets but they can play their part and we will do so,” he said.
