Chancellor Kwasi Kwarteng has dropped plans to scrap the top rate of income tax amid growing unrest within the party over the backlash to his mini-budget.
The 45p rate applying south of the border for those earning more than £150,000 a year will remain after it became clear dozens of MPs would refuse to back the move in the Commons.
Mr Kwarteng said in a statement on Twitter that the government is “not proceeding with the abolition of the 45p tax rate”. He added: “We get it, and we have listened.
“This will allow us to focus on delivering the major parts of our growth package.”
The announcement was followed by a rise in the pound against the dollar. Sterling was up 0.7% to $1.2453 before settling 0.2% higher at $1.1192.
Shadow Chancellor Rachel Reeves said: “The Tories have destroyed their economic credibility and damaged trust in the British economy. Their kamikaze Budget needs reversing now.”
Alex Shairp, founder of Glasgow-based Blackmount Private Wealth said: “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% 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.”
Mr Kwarteng will address the Tory conference today and will insist that he will manage taxpayers’ money with an “iron-clad commitment to fiscal discipline”.
He will say the plunging pound is symptomatic of a decline by other currencies against a strong dollar and that other economies are facing rising inflation, interest rates and energy costs.
Mr Kwarteng will tell the party’s annual conference that his approach will get the economy on track for 2.5% growth.
His speech will determine the direction of the markets, though he is not due on stage in Birmingham until about 4pm and may not conclude before the London Stock Exchange closes at 4.30pm.
Former Tory Chancellor George Osborne said it was “touch and go whether the Chancellor can survive” the fallout, telling the Andrew Neil Show it would be “curtains” for Mr Kwarteng if his speech was badly received.
Mr Kwarteng will set out a “new economic deal ” for Britain and will argue that his plan is “sound, credible and will increase growth”.
He will tell delegates: “I refuse to accept that it is somehow Britain’s destiny to fall into middle income status or that the tax burden reaching a 70-year-high is somehow inevitable. It isn’t, and shouldn’t be.
“We needed a new approach, focused on raising economic growth.
“That is the only real way to deliver higher wages, more jobs, and crucially, revenue to fund our precious public services, and it is the only way to achieve long-term fiscal sustainability.
“We must stay the course. I am confident our plan is the right one.”
The Chancellor is expected to set out further details of his reforms, including the so-called “Big Bang 2.0” package of financial regulation, in the coming weeks. MPs will not get to vote on the package before his “medium-term fiscal plan” is delivered on 23 November, which will be accompanied by the Office for Budget Responsibility’s forecasts.
Prime Minister Liz Truss admitted yesterday that she failed to prepare the markets for the package of cuts. She also declined to rule out cuts in public spending to help balance the books, stating only that the government was seeking “value for money”. However, there is wide expectation that benefits will see a real-terms cut just as earners on more than £150,000 see their taxes slashed.
The decision to scrap the 45p additional rate of tax for the highest earners in England, Wales and Northern Ireland has been criticised by the International Monetary Fund, opposition parties and former Tory Cabinet ministers after it resulted in a £65 billion emergency intervention by the Bank of England.
Tory MPs have been rattled by opinion polls putting the Conservative Party between 20 and 33 points behind Labour.
Former ministers Michael Gove and Grant Shapps said it was wrong to cut income tax for high earners at a time when millions of people are feeling the cost of living squeeze. Mr Gove hinted that he would vote against the Chancellor’s package.
In Scotland, First Minister Nicola Sturgeon has indicated that she has no intention of scrapping the 46p tax rate.
There was further surprise yesterday when Ms Truss revealed that cutting the top tax rate was Mr Kwarteng’s decision and that other Cabinet members had not been told about it before it was announced in the 23 September Fiscal Event.
Scottish Tory MP Andrew Bowie, who was parliamentary private secretary to Theresa May when she was in No 10, agreed with Mr Gove that unfunded tax cuts were not Conservative.