Who benefits from tax cuts in Liz Truss and Kwasi Kwarteng’s mini budget?

Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng. (PA)
Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng. (PA)

Liz Truss and Kwasi Kwarteng have doubled down on their economic plans after the chancellor's mini budget plunged the markets into chaos.

In her first public comments since the announcements Truss defended the measures, insisting “urgent action” was needed and that hers was the "right plan".

Kwarteng's announcement on Friday, which included tax cuts worth tens of billions, sparked a sharp drop in the value of the pound and a surge in the price of government debt.

It was harshly criticised by economists, with the IMF taking the unusual step of criticising the unfunded tax cuts and warning the policies could increase inequality.

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The Bank of England even stepped in on Wednesday and launched an emergency government bond-buying programme to prevent borrowing costs from spiralling out of control and stave off an economic crisis.

According to analysis from the Resolution Foundation think thank, the tax cuts will cost £45bn, but who will benefit from the most?

By far the biggest beneficiaries of the measures are the UK's highest earners, who will see their incomes soar thanks to the abolition of the top 45p tax rate for people earning £150,000 or more and the cancellation of the 1.25 percentage point National Insurance hike brought in by Rishi Sunak.

According the Resolution Foundation, the cuts will "overwhelmingly benefit those on the highest incomes in the South of England."

Abolishing the 45p rate of Income Tax will boost the take-home pay of the UK's highest earners (Yahoo News UK/Flourish)
Abolishing the 45p rate of Income Tax will boost the take-home pay of the UK's highest earners (Yahoo News UK/Flourish)

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A person earning £200,000 gains £5,220 a year, with the gain rising to £55,220 a year for a £1 million earner.

Someone who earns £20,000 a year gains £157.

According to the Resolution Foundation, this means almost half of the gains will go to the richest 5% of society and the poorest half of society will get just 12% of the gains.

Even though 1p is being slashed from the base income tax rate, the vast majority of people will end up paying more tax than they would have a few years ago thanks to the freezing of income tax thresholds.

Households in the South East will gain the most from the mini budget, while those in the North East will gain the least (Yahoo News UK/Flourish)
Households in the South East will gain the most from the mini budget, while those in the North East will gain the least (Yahoo News UK/Flourish)

At a regional level, those living in the South East will see over three times the gains of those in the North East.

The cuts largely reverse the policies announced by Sunak while he was Chancellor.

In order to pay for the cost of the pandemic, Sunak froze income-tax thresholds for four years.

Usually, the amount people can earn before they start paying income tax increases with inflation.

But the freeze during a time of high inflation is now leading to people paying more tax.

With inflation so high, for most people this will counteract the gains they will get from the 1p base rate national income tax cut.

Those earning under £155,000 will see their tax bill increase or be unaffected, with only those earning over £155,000 will receive a net tax cut thanks to the scrapping of the 45p tax rate.

Medium taxpayers between £63,000 and £125,000 lose the most, around £1,500 in 2025-26.

The Resolution Foundation concludes only the top 5% will see any significant benefit to the tax cuts.

Tax as a share of the economy remains at its highest sustained level since the 1940s at around 35% of GDP.