After the UK government made a U-turn on a plan to abolish the 45p rate of income tax for top earners, investment managers react.

The plan to axe the 45p rate, paid by people earning more than £150,000 ($169,300) a year in England, Wales and Northern Ireland, was announced by Chancellor of the Exchequer Kwasi Kwarteng as part of a package of tax cuts in his "min-budget" more than a week ago. 

Kwarteng decided, however, to reverse course this week after the decision to axe the top rate drew opposition from the markets and Conservative MPs worried that it gave the impression that the government was favouring the wealthy. Kwarteng said he decided to change course because the issues were “drowning out a strong package.”

Abolishing the top rate made up around £2 billion of the £45 billion worth of tax cuts announced by the chancellor in the mini-budget. Other measures announced included a cut to the basic rate of income tax to 19 per cent, a reversal of the recent rise in national insurance and removal of the planned increase in the corporation tax rate.

At the heart of the issue is whether cuts to a top rate – which when combined with payroll taxes (National Insurance Contributions) take more than half a person's earnings – makes sense if a government is trying to encourage entrepreneurship and growth. Defenders of the cut – such as think tank the Institute of Economic Affairs – say that a flatter, lower tax regime raises more revenue overall, while opponents say it is fairness rather than economic outcomes that should dictate policy, even if means slower growth.

Here are some reactions from investment managers to the move. 

Bethany Payne, global bonds portfolio manager, Janus Henderson Investors
“In spite of a significant U-turn from the Chancellor, the currency moves have been fairly minor with sterling trading at similar levels to where it was on Friday and still just below the levels prior to the mini budget. Meanwhile the Bank of England is in crisis talks with regulators to provide a more medium-term solution to backstopping pension fund strategies to prevent a repeat of last week’s market movements. The Bank of England has so far delayed the date of their own gilts sales to 31 October, in effect giving them and the government a four-week window for resolution. While authorities dash to save the long-end of the bond market, sterling still remains under its own unique pressures and we expect it to remain unloved for some time.”
 
Christy Wilson, associate at Katten UK 
“The concerning element of this U-turn is that only a couple of days ago Liz Truss and the Chancellor maintained that cutting the 45 per cent income tax rate was the right thing to do, but now they have abandoned these plans. This calls into question other tax cuts that were announced – will these be reversed too? Potentially, some of this upset could have been avoided if the government had allowed the OBR to put together their economic projections in respect of the budget, then there would be much more certainty around the budget’s likely effects.”

Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management 
"The additional rate tax cut was politically toxic so it seems a U-turn was inevitable. The intent to rein in the fiscal largesse will be welcomed by markets. Sterling is stronger but bonds remain weak. However, there is a substantial ongoing deficit to fund. And if, as rumoured over the weekend, this is likely to be financed by cuts in spending and benefits then another showdown looms. Confidence is still lacking in this government and there is a “cliff edge“ in a couple of weeks when the Bank of England's emergency bond buying programme comes to an end."

Nick Lincoln, director at Watford-based Values to Vision Financial Planning 
"Above all, this U-turn signals to the world that we are governed by people with no spine. The irony is that the markets were not spooked by the income tax fiddling. They were spooked by high inflation and the enormous energy bill supports, and on that front nothing has changed. It's a symbolic move but one that will likely do nothing to counteract the pressure on sterling."

Adrian Kidd, chartered wealth manager at Aylesbury-based EQ Financial Planning   
"The pressure cooker got too hot, and it was nice to see the Chancellor's friend, Liz Truss, throwing him under the bus by saying it was all his idea. That highlights more issues within government than we already thought. The next question is, which other policies now go to the place where they belong, namely the scrapheap? Maybe the OBR gave a hint last week in that meeting that if you scrap X, Y and Z then you might just get away with it."

Alex Shairp, founder at Glasgow-based Blackmount Private Wealth     
"Politicians attract ridicule for changing their mind on important matters. In this case, I can understand why. The government clearly believes in this policy but has succumbed to political pressures. Reversing the abolition of the 45 per cent rate now only adds to the chaos and uncertainty. Financial and currency markets reacted as they did to the mini-Budget because it was unsubstantiated. They lost confidence. A flip-flop doesn't restore confidence."

Lewis Shaw, founder of Mansfield-based Shaw Financial Services    
"The Chancellor says he has listened and decided to U-turn. They still don’t get it. They should never have even attempted this policy in the manner they did. This is, at its heart, not a policy issue, it’s a credibility issue. Either they did know what would happen to financial markets but didn’t care until it became too politically toxic, or they didn’t know what would happen, proving they’re economically illiterate. Either way, their reputation is in tatters, market confidence has packed its bags and got on a plane and mortgages are shot to bits. If I caused half as much carnage in any business in less than a week, I’d be given my marching orders, and rightly so."

Riz Malik, director of Southend-on-Sea-based R3 Mortgages   
"This is welcome news and almost certainly the right decision. However, the OBR's response to the mini-Budget needs to happen as soon as possible to potentially undo some of the damage that was done last week. Even if the markets respond well, I fear mortgage lenders may take some time to reflect positive news in their pricing. We may see further U-turns at this rate."

Gaurav Shukla, mortgage adviser at London-based broker, Home Me   
"It was only a matter of time before Kwasi Kwarteng retracted some of the outrageous policies announced at the mini-Budget. He needs to reinject confidence in the pound and ease the uncertainty in the financial markets. The biggest question here is, is he the right Chancellor to take us forward, and will Liz Truss continue to defend him?"