Hunt refuses to rule out shock income tax cut amid warnings of revolt if budget favours rich

The prospect of a shock income tax cut on Wednesday emerged today after chancellor Jeremy Hunt failed to rule it out.

Mr Hunt said he wanted to put the country on “the path to lower taxes” but would “only do so in a responsible way”, as he prepares to unveil his autumn statement.

Pressed by the BBC’s Laura Kuennsberg on whether he intended to cut income tax, the chancellor declined to comment, saying “our priority is growth”.

The chancellor had been thought to be proposing a cut to inheritance tax and a move to ease business taxes.

But the possibility of an unexpected cut in income tax and national insurance looked on after reports that Mr Hunt and Rishi Sunak are “mulling it over”. They are said to be considering the moves after an unexpected windfall in Treasury coffers.

If confirmed, it would mark a major shift in the government’s strategy. They were thought to have been planning a personal tax cut in the Spring Budget to woo voters in the run-up to the general election due next year.

But improved public finances and warnings of a backlash from “red wall” Conservative MPs in the north of England to plans to cut inheritance tax on Wednesday are understood to have prompted a rethink.

Mr Hunt and Mr Sunak have been told such a decision would be seen as a “hand out to the rich” and cost them support votes among working class voters who backed the Tories in the 2019 election.

A reduction in the basic income tax rate or national insurance would benefit millions more. It is also seen by many as a way of trying to erode Labour’s big lead in the polls by forcing Sir Keir Starmer to say if he would reverse any tax cuts if he wins power.

A cut in income tax would also help Mr Sunak shore up support among right-wing Tory MPs who have been demanding such action and who were furious at his firing of home secretary Suella Braverman.

However, a tax cut is not without political peril. Many economic experts have said that notwithstanding the chancellor benefitting from an enhanced fiscal ‘headroom’ of £25bn – much bigger than his previously anticipated £6.5bn – it is too soon to risk big tax cuts.

Moreover, when Mr Sunak replaced Liz Truss in No 10 he promised that he would not repeat her reckless financial handling that caused a major economic crisis.

It comes as a new report by the respected Institute for Fiscal Studies (IFS) report says an inheritance tax cut would deliver an average £180,000 windfall for millionaires.

Senior Tory MP John Stevenson, who chairs the Northern Research Group, said he backs reforming inheritance in the long-term – but told the Observer that “at this time any tax cuts should be aimed at helping businesses or the lower paid”.

Former Tory minister Jonathan Gullis, the MP for Stoke-on-Trent North, said he believes inheritance tax should be “eventually abolished” – but said that “now is not the right time for this tax cut”.

The right-wing red waller argued that cutting the basic rate of income tax and increasing the threshold for the 40p rate would help families “really feeling the pinch”.

Mr Hunt gave his strongest hint yet that he was ready to cut taxes on Wednesday – telling Sky’s Sunday Morning with Trevor Phillips: “We need to show there is a path to a lower tax economy.”

The chancellor would not be drawn on whether he could cut income tax or national insurance, but told the broadcaster cuts may be necessary to cut taxes. “If you want to bring down personal taxes the only way to do that sustainably is to spend public money efficiently.”

Mr Hunt did not deny an inheritance tax cut was under consideration. “Everything is on the table in an autumn statement,” he said.

The Sunday Times reported that Mr Hunt and the PM are now weighing up cuts to income tax or national insurance, in a last-minute move to boost growth and their favour with voters.

They are reportedly more focused on the headline rates of income tax, rather than thresholds. The newspaper also said that Mr Sunak and Mr Hunt could put off the mooted cut to inheritance tax until the spring budget.

Mr Hunt is also under pressure over a squeeze on benefits, as he looks to fund tax cuts. Typically ministers use the September figure for inflation when uprating working-age benefits, which would mean a 6.7 per cent hike.

But Mr Hunt has not ruled out using October’s far lower figure of 4.6 per cent, which would cut spending by around £3bn. The savings would largely affect working-age households receiving disability or means-tested benefits, according to the IFS.

Using the lower rate would affect the incomes of nine million low-income families, according to the Resolution Foundation. New analysis by the think tank said families some would lose as much as £500 a year.

Slashing inheritance tax – potentially by half – would be popular with the Tory right as Mr Sunak comes under growing pressure from that wing of his party, but would only directly benefit a small proportion of the public.

Only around 4 per cent of deaths in 2020/21 resulted in inheritance tax being paid, with exemptions allowing many couples to pass on up to £1m tax-free. Inheritance tax is charged at 40 per cent on estates of more than £325,000, with an extra £175,000 towards a main residence passed to direct descendants.

But Mr Hunt is said to be considering cutting it in half to 20 per cent, before a potential promise to abolish it entirely in the next Tory manifesto.

Former Conservative minister David Gauke told the BBC that cutting inheritance tax while millions struggle risked “re-toxifying” the Tory party. And Labour’s shadow chancellor Rachel Reeves said cutting inheritance tax seems an “unusual way” to help millions of struggling Britons.

“We are in the middle of a massive cost-of-living crisis and cutting inheritance tax – which benefits less than 4 per cent of estates each year – that seems an unusual way to tackle the scale of the cost of living crisis that we have right now,” she told Sky News.

Torsten Bell, head of the Resolution Foundation, questioned the idea of cutting inheritance tax now. “Even if you think lower inheritances taxes are desirable, are they more desirable than not whacking up taxes on income quite so much?”

Tax campaigner Richard Murphy also condemned the idea, calling it “easily the most stupid [potential tax cut] right now”. He added: “Doing so would save millions for a few already relatively rich people, do nothing for the economy, and increase inequality.”

Mr Hunt is also set to announce that households closest to new pylons and electricity substations could receive up to £10,000 off their bills over 10 years under plans aimed at boosting growth.

However, Liberal Democrat Treasury spokeswoman Sarah Olney said it would create “a postcode lottery system leaving millions of families still facing higher energy bills while others benefit”.

And Jonathan Bean, of Fuel Poverty Action, said it was an “ill-conceived”. He told The Independent: “It’s pretty crazy that some wealthy people in huge homes in the countryside could get a big discount, when we’re seeing some people forced to turn off their heating or forced to go to food banks.”