U.K. Scraps Plan to Cut Income-Tax Rate for Top Earners

Ms. Truss, who based her nascent leadership on a sweeping revamp of the British economy, defended the measure as recently as Sunday but eventually buckled under the pressure of international investors who balked at the scale of unfunded tax cuts and Conservative Party lawmakers shocked by polls showing they faced a near total wipeout at the next general election.

The pound rallied 1.3% against the dollar and bought $1.13 in late Monday trading—a higher rate than before the tax plans were unveiled last week. U.K. borrowing costs mostly fell, with the yield on the 10-year gilt slipping 0.21 percentage point to 3.93%, although yields were still far higher than before the plans.

“I know the plan put forward only 10 days ago has caused a little turbulence. I get it,” Mr. Kwarteng, the U.K.’s Treasury chief, told party members gathered at an annual conference on Monday. He said he hoped getting rid of the planned cut to the 45% rate would allow people to focus on the rest of the government’s pro-growth agenda.

He also sought to reassure financial markets: “There is no path to higher sustainable growth without fiscal responsibility.”

Under pressure from lawmakers, Mr. Kwarteng late Monday decided to bring forward the Office for Budget Responsibility analysis of public finances to October from Nov. 23. The report is seen as key to providing transparency to the market about whether and when the government program will generate growth.

Still, political analysts said the chaos of the past week marked a rocky start to Ms. Truss’s tenure and raised questions over whether she can hold her party together as she seeks to implement spending cuts to help fund the plan’s remaining tax cuts and reassure markets about the scale of government debts.

U.K. bookmakers Oddschecker on Monday placed the odds of Ms. Truss being forced out of leadership at 4-1, compared with 66-1 last week. “One of the most incompetent, catastrophic debuts in political leadership I’ve seen,” wrote Brian Klaas, an associate professor of global politics at University College London, on Twitter.

The move to slash the top income-tax rate was a small part of a much bigger stimulus announced on Sept. 23 that paired large subsidies to help homeowners and businesses cope with rising energy costs along with the biggest tax cuts in a generation, a package funded by borrowing that raised alarm among investors.

The most controversial part of the plan was the move to cut the highest rate of income tax on the wealthy at a time when high inflation is cutting into real wages and a recession looms.

Conservative Party lawmakers had lined up to criticize the abolition of the tax. On Sunday,

Michael Gove,

a former senior cabinet minister, said it was morally wrong. The growing list of rebels meant the government would likely have struggled to get the top-rate tax cut voted through Parliament.

Despite the change, questions remain about the plan’s economic viability. The change will affect only £2 billion, the equivalent of $2.23 billion, out of an initial package of tax cuts that totaled £45 billion in foregone revenue for the government, according to the Institute for Fiscal Studies, an independent think tank. It estimated the British government would still require an additional £72.4 billion in debt issuance this financial year.

This is “a rounding error in the context of the public finances,” said Paul Johnson, director of the IFS. “The chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability.”

Still, the move to roll back the tax cut was welcomed by some investors as an important signal that the government was responding to market concerns about the plan’s impact on inflation and debt at a time of rising interest rates and financial uncertainty.

“It’s a first step in restoring credibility that was lost after the fiscal statement,” said

Cathal Kennedy,

U.K. economist at RBC Capital Markets.

Government officials on Monday said they intended to press ahead with other measures announced in the mini-budget, including a reduction in the lowest rate of income tax that economists estimated was set to cost much more than the removal of the highest rate in lost revenues. Other controversial measures remain, including scrapping a cap on banker bonuses imposed after the 2008 financial crisis.

The International Monetary Fund gave a rare rebuke of the initial plan, saying it risked further fueling inflation that the BOE sees hitting 11% later this year. On Friday, ratings agency S&P lowered its outlook on U.K. sovereign debt to negative, citing risks to the country’s economy.

Political analysts said the Truss government was likely bowing to political reality as much as economic reality.

“This move is rather symbolic, being less about the amount of money it will save and more about the poor signal it had delivered of ideological tax cuts,” said

Chris Turner,

an analyst at ING Bank. “The move looks driven by a backlash from her own party and perhaps the threat of a sovereign rating downgrade.”

The top-rate tax cut had threatened to completely overshadow the annual Conservative Party conference that is currently under way in Birmingham. The conference, normally a three-day show of devotion to the party leader, is instead turning into a more somber event as the Tories brace for a difficult few years ahead of an election in 2024.

A series of opinion polls after the plan pointed to a big loss of support for the Conservative Party among voters as it approached the gathering.

At the conference,

Chris Philp,

a senior Treasury minister, said he expected the party to support the rest of the tax-cutting package and argued that the U.K. government had a strong balance sheet. “We think they are the right plans because ultimately those plans are what make our economy competitive,” he said.

Monday’s announcement is the latest step to stem the fallout from the fiscal plan. Last week, after coming under pressure from the BOE, the government announced the Office for Budget Fiscal Responsibility, an independent public finances watchdog, will in November lay out the full cost of the package and whether it will generate the 2.5% a year of economic growth the government promises. The government had resisted having the watchdog score the plan.

Mr. Kwarteng also promised on Monday that no new tax cuts would be coming. Both steps were also welcomed by investors.

“That’s quite a shift,” said Chris Jeffery, head of interest rates and inflation at Legal & General Investment Management.

The government said it would outline other steps to pay for the tax cuts in November, including likely spending restrictions such as making below-inflation increases to unemployment benefits. In the meantime, the government is hoping to win over doubters with a drumbeat of new announcements of regulatory reforms to make everything from agriculture to child-care provision more competitive.

Worries about the impact of tax cuts on government borrowing helped push yields on government bonds sharply higher early last week. On Wednesday, the BOE stepped in to halt the surge and the threat of significant harm to some pension funds, announcing that it would buy up to £65 billion of government bonds in a series of daily auctions.

When the bank intervention ends in mid-October, yields could rise again, but not as quickly as in recent days, said Orla Garvey, a fixed-income portfolio manager at

Federated Hermes.

Write to Paul Hannon at paul.hannon@wsj.com, Max Colchester at max.colchester@wsj.com and Anna Hirtenstein at anna.hirtenstein@wsj.com