Liz Truss has executed a major U-turn by scrapping plans to axe the 45p top rate of tax after facing a growing revolt from Tory MPs led by former cabinet ministers Michael Gove and Grant Shapps.

Investors bought sterling and UK government bonds in response to the policy reversal. By Monday afternoon the pound had returned to the level it had been at before the government announced its tax-cutting plan last month.

After insisting on Sunday that the controversial plan to abolish the 45p rate would go ahead, Truss concluded after talks with her senior team that it stood no chance of getting through the House of Commons.

On Monday morning Kwasi Kwarteng, her chancellor, confirmed he was abandoning the plan laid out in his “mini” Budget 10 days ago to cut the taxes of Britain’s richest 1 per cent; the 45p rate applies to earnings of more than £150,000. In a statement, he said: “We get it, and we have listened.”

The chancellor added: “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 country.”

By afternoon trading on Monday the pound had risen 0.5 per cent against the dollar to just over $1.12. This compared with sterling’s record low against the US currency a week ago after Kwarteng announced the debt-funded £45bn package of tax cuts on September 23.

The price of UK government debt rose following Monday’s announcement, pushing yields lower. The 10-year gilt yield fell 0.1 percentage points to 3.97 per cent, having reached a high of almost 4.6 per cent during last week’s market ructions.

The retreat comes on the day Kwarteng addresses the Conservative conference in Birmingham and will add to Tory concerns that he and Truss have lost a grip on the government and the economy.

Although scrapping the top rate of tax would have cost only between £2bn and £3bn a year, it was seen by some Tory MPs as totemic of a government that appeared to be losing touch with voters.

One cabinet minister close to Truss said: “It’s a very painful decision but we had no choice ultimately. There was no way we were going to get the Budget through.”

Truss and Kwarteng held emergency talks on Sunday in Birmingham, according to government insiders, after facing a growing rebellion from Tory MPs who publicly stated they would vote against the 45p measure.

Another senior minister said: “The politics of this were just awful and I am amazed the idea has lasted as long as it did.”

On Sunday Gove, a former cabinet minister, put himself at the forefront of the Tory mutiny over the tax cut, saying it was wrong at a time when “people are suffering”.

Shapps, former transport secretary, also denounced the plan, saying it would not survive a parliamentary vote.

Another Tory MP representing a working-class seat described as “deranged” the idea of slashing taxes for the rich while planning cuts to benefits and public services.

Kwarteng told BBC Breakfast on Monday that the government had scrapped the measure to focus on delivering its growth plan.

“What was clear talking to lots of people up and down the country, talking to MPs, talking to voters, talking to constituents, was that the 45p rate was becoming a distraction on what was a very strong plan,” he said.

Kwarteng said he had been in parliament for 12 years and it was normal for the government to listen to people and change its mind. He insisted that he had no plans to resign.

“We were talking to a whole range of stakeholders and we felt that the 45p issue . . . was drowning out a strong intervention on energy, tax cuts for people generally.”

Julian Smith, former chief whip, said he welcomed the U-turn. “Kwasi Kwarteng and Liz Truss have listened. Fair taxation is key as the government gets on with its work,” he said.

Having retreated on the 45p tax rate plan, Kwarteng and Truss could now come under pressure to reverse other proposed unfunded tax cuts that have blown a hole in the public finances.

They include a £13bn reduction in national insurance, which gives the biggest benefit to better-off voters, and a £17bn plan to reverse a corporation tax rise — a policy that business leaders have said is not a priority.

Rachel Reeves, shadow chancellor, said the Tories had “destroyed their economic credibility” and damaged trust in the British economy.

“The prime minister has been forced to abandon her unfunded tax cut for the richest 1 per cent — but it comes too late for the families who will pay higher mortgages and higher prices for years to come.”

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