The cap, introduced by the European Union in the wake of the 2008 financial crash, curbs bankers’ annual payouts to twice their salary.
The end of the measure was confirmed as part of Mr Kwarteng’s so-called mini-budget aimed at bouncing back from the cost of living crisis through ‘growth-focused’ policies.
A massive government support package to keep households’ energy bills frozen at £2,500 on average was confirmed along with tax cuts and other policies.
He pledged the strategy would turn the UK’s ‘vicious cycle of stagnation into a virtuous cycle of growth’.
‘Supply-side’ reforms such as a major boost ‘get Britain building’ with new housing and infrastructure projects.
Mr Kwarteng also hinted that he would loosen regulations on banking activities in the coming weeks.
Labour attacked the Tories for potentially allowing bankers’ earnings to swell when many families face the biggest cost-of-living squeeze in a generation this winter.
But economists say many firms have got around the cap by paying higher base salaries, pushing up banks’ fixed costs and making the UK less attractive for investment than the US or Asia.
Mr Kwarteng told the Commons: ‘A strong UK economy has always depended on a strong financial services sector.
‘We need global banks to create jobs here, invest here and pay taxes here in London. Not in Paris, not in Frankfurt, and not in New York.
‘All the bonus cap did was to push up the basic salaries of bankers or drive activity outside Europe.
‘It didn’t cap total remuneration, so as a consequence of this we are going to get rid of it.
He added: ‘To reaffirm the UK’s status as the world’s finance services sector, I will set out an ambitious package of regulatory reforms later in the autumn.’
Labour’s shadow chancellor, Rachel Reeves, did not comment directly on the decision but accused the government of ‘shielding’ energy providers’ profits and bankers’ pay while ‘piling the crushing weight [of its support package] onto the backs of taxpayers.
She said: ‘Where have the last 12 years left us? Lower growth, lower investment, lower productivity – and today, we learn, lowest consumer confidence since records began.
‘The only things that are going up are inflation, interest rates and bankers’ bonuses.
‘As the Tories become more and more detached from reality millions of poeple are lying awake at night worrying about how they’re going to make ends meet.
Before the announcement, former Bank of England monetary policy committee member Andrew Sentance said lifting the cap might benefit the economy in a few years but was ‘poorly timed’.
He told BBC Radio 4: ‘It sends a rather confused signal when people are being squeezed in terms of the cost of living and the Government is trying to encourage pay restraint in the public sector’.
‘So to appear to allow bankers to have bigger bonuses at the same time doesn’t look very well timed.
‘There may be some longer-term arguments for pursuing this policy, but I think the timing would be very bad if they did it now.’
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