The chancellor Jeremy Hunt has scrapped almost all tax cuts announced in last month’s mini-Budget, including deferring a 1p cut to income tax “indefinitely” and axing a proposed cut to corporation tax in a major U-turn for Liz Truss’ government.

Hunt, who replaced Kwasi Kwarteng as Chancellor on Friday, brought forward his fiscal statement by two weeks in a bid to stabilise financial markets. The Treasury said the combined U-turns will save the government around £32bn a year.

The move is part of prime minister Liz Truss’s battle for political survival as leading business figures and Conservative MPs pile pressure on her to resign.

“We will continue with the abolition of health and social care levy and the stamp duty change, off payroll working reforms, the new VAT-free shopping scheme for non-UK visitors and the freeze on alcohol duty rates,” Hunt said.

Following conversations with the prime minister, the chancellor has taken these decisions to ensure the UK’s economic stability and to provide confidence in the government’s commitment to fiscal discipline. The chancellor made clear in his statement that the UK’s public finances must be on a sustainable path into the medium term.

In his statement the chancellor announced a reversal of almost all of the tax measures set out in the Growth Plan that have not been legislated for in parliament. The following tax policies will no longer be taken forward:

• Cutting the basic rate of income tax to 19% from April 2023. While the government aims to proceed with the cut in due course, this will only take place when economic conditions allow for it and a change is affordable. The basic rate of income tax will therefore remain at 20% indefinitely. This is worth around £6 billion a year.
• Cutting dividends tax by 1.25 percentage points from April 2023. The 1.25 percentage points increase, which took effect in April 2022, will now remain in place. This is valued at around £1 billion a year.
• Repealing the 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) from April 2023. The reforms will now remain in place. This will cut the cost of the government’s Growth Plan by around £2 billion a year.
• Introducing a new VAT-free shopping scheme for non-UK visitors to Great Britain. Not proceeding with this scheme is worth around £2 billion a year.
• Freezing alcohol duty rates from 1 February 2023 for a year. Not proceeding with the freeze is worth approximately £600 million a year. The next steps of the Alcohol Duty Review announced in Growth Plan 2022 will continue as planned. The alcohol duty uprating decision and interactions with the wider reforms to alcohol duties under the Alcohol Duty Review will be considered in due course.

This follows on from the previously announced decisions not to proceed with the Growth Plan proposals to remove the additional rate of income tax and to cancel the planned increase in the corporation tax rate.

The government’s reversal of the National Insurance increase and the Health and Social Care Levy, and the cuts to Stamp Duty Land Tax, will remain benefitting millions of people and businesses. The £1m Annual Investment Allowance, the Seed Enterprise Investment Scheme and the Company Share Options Plan will also continue to further support business investment.

Industry reaction: 

Director of Benham and Reeves, Marc von Grundherr, commented:

“An extraordinary turn of events, quite literally, but one that should help strengthen a property market that was starting to wobble under the pressure of increasing mortgage rates and dwindling buyer sentiment.

While maintaining a cut to stamp duty will help stimulate buyer demand within the market, overall market health will be far better maintained by stabilising the mortgage sector and our ability to fund a property purchase in the first place.

We should now see this with pressure easing, making the threat of further mortgage rate increases over the coming months less likely.”

James Forrester, MD of Barrows and Forrester, commented: “It’s impossible to tell just what direction the economy will head following the latest government spectacle, but today will bring an air of positivity to what was quickly becoming a beleaguered property market.

Stability in the gilt markets will bring positive movement for those looking to borrow. But it’s important to understand that we aren’t going to return to a sub one per cent base rate and homebuyers must be prepared to pay more in mortgage costs when climbing the ladder.

However, the government’s choice to maintain the cut to stamp duty tax signals their intent to keep the property market buoyant and this should help boost buyer confidence in itself.”

Lawrence Bowles, director of research at Savills, said: “In many ways, the chancellor’s announcement [yesterday] was the best feasible outcome for the housing market.

“Almost all of the tax cuts announced in the Truss/Kwarteng “mini” Budget three weeks ago have gone. Even measures that had been announced previously, such as the 1p cut to the basic rate of income tax, have been shelved.

“Reversing these cuts drastically reduces the size of the financial black hole the government has to clamber its way out of. That should reassure global financial markets that the UK remains a safe place to invest, bringing gilt yields down.

“This, in turn, will reduce the need for the Bank of England to hike base rates. It means we can expect to see mortgage rates peak lower and fall faster once we pass peak inflation.

“But some tax changes remain: most pertinently, the cut to stamp duty. This cut means home movers and investors could save up to £2,500 on home purchases. First-time buyers could save up to £11,250.

“While these sums may not be enough on their own to encourage someone to move, they may give a push to any households sitting on the fence. In particular, households facing the prospect of remortgaging may take advantage of the stamp duty cut to move – their mortgage costs are going up either way, after all.

“It may be a long time until we see mortgage rates back to where they were in recent years. But, for now, we do expect to see some of the existing downward pressure on house prices and transactions to be tempered – if only a little.”

Nathan Emerson, CEO of Propertymark, said: “The chancellor’s commitment to the Stamp Duty thresholds that better represent house prices will certainly help to restore some market stability and confidence which has taken a hit.

“Mortgage rates were already rising and we hope the wider announcements made today will translate into a settling down of that trajectory so buyers can proceed with more confidence that some of those additional lending costs will still be offset by Stamp Duty savings.”

Managing director of HBB Solutions, Chris Hodgkinson, commented: “A case of too little, too late, where the UK property market is concerned as the damage has already been done to homebuyer sentiment, as well as their ability to borrow in order to fund their purchase.

Even if we do now see mortgage rates level out, many will be far too worried to proceed with a purchase in fear of another government U-turn further down the road, leaving them unable to afford the cost of their mortgage.

As a result, we can expect market activity to remain muted over the coming months, causing house prices to drop as a result.”

CEO of Alliance Fund, Iain Crawford, said: “Although today’s U-turn is an attempt to calm the waters, it’s fair to say that the government’s shambolic behaviour is unlikely to distil much confidence in the UK economy.

However, as it stands, the UK public will embrace any shred of stability afforded to them in what are currently very uncertain times and the one silver lining of this latest government backtrack should be a boost to property market confidence.

We’re already seeing a strengthening of the pound with gilt yields also dropping and this easing pressure on the markets should reduce the likelihood of higher interest rates.

This will help settle what has been a turbulent mortgage market in recent weeks, rejuvenating buyer demand levels, which will also help to stabilise house prices and investment into the UK property market.”

Nicky Stevenson, MD at Fine & Country, said: “The chancellor has scrapped nearly all his predecessor’s tax cuts, but the overhaul of stamp duty remains.

“Against a backdrop of spiking interest rates and unprecedented volatility in the mortgage market, a U-turn on stamp duty would have represented a worrying set-back for the housing market, and buyers will be breathing a sigh of relief at Mr Hunt’s commitment to pressing ahead with change in this area.

“All eyes will now be on the effects of the broader rollback on tax cuts and the near term trajectory of interest rates.

“With the Bank of England poised to hike its base rate further in November, we anticipate a period of subdued transaction levels in the months ahead as purchasing power continues to be eroded.

“This remains a challenging time for both existing homeowners and buyers as rising borrowing costs force them to reassess their budgets and make hard choices.”