FOLLOW US

The U.K. government on Monday canceled a plan to scrap the top rate of income tax, after a public backlash and major market meltdown.

The new government had announced a plethora of tax cuts just weeks into its tenure, but they were poorly received by financial markets. Taking the top rate of tax paid on incomes over £150,000 ($166,770) from 45% to 40% was seen as particularly politically toxic as Brits deal with a cost-of-living crisis.

Following the announcement, the pound plunged to an all-time low, mortgage deals were pulled from the market and U.K. government bonds began to sell off at a historic rate, causing the Bank of England to begin a temporary purchase program to calm volatility.

On Monday, Finance Minister Kwasi Kwarteng confirmed that the government would be scrapping its plans to cut tax for the country’s highest earners.

“It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our economy,” Kwarteng said in a statement.

“As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.”

Jane Foley, senior FX strategist at Dutch bank Rabobank, said, “Although U.K. assets are reacting well to the U-turn, they are far from being out of the woods.”

Ten-year gilt yields were lower Monday morning, with the yield dropping nearly 2% at 9 a.m. The two-year was choppy.

“There will still be a lot more gilt issuance this year and, as things stand, the BOE’s extraordinary support will end on Oct. 14. Then, [quantitative tightening] is supposed to be starting on Oct. 31, though there is a lot of speculation that there is next to no chance of this happening,” Foley added.