May 14, 2008 | posted by Michael Baxter in Taxation |

Gordon Brown and Alistair Darling need to remember to kiss more.  No, not that type of kiss, this one:  Keep It Simple, Stupid.

Yesterday, Alistair Darling did get the kiss in.  By upping personal allowances by £600, and by reducing the threshold for paying 40 per cent tax, in one foul swoop he solved the problem.  Well, not entirely solved, some will still be worse off, but at least it’s getting better.

It really is simple to explain. 

Last year, most of us enjoyed a personal allowance of £5,225. Our next £2,230 of earnings were taxed at 10p, then we were paying 22p tax for the next £32,369.  Then, in his last budget, GB set our personal allowance for this year at £5,435, removed the 10p band, but lowered the 22p rate to 20p.    So, obviously, someone who was not previously earning a sufficient amount to fall into the 22p tax bracket, but was then set to pay tax at 2op, was going to be worse off.

Now, Mr Darling has upped the personal allowance by £600. Previously, anyone earning up to around £18,500 was going to be worse off, although at that level of income the loss would have been tiny. Now you would need to be on an income of between just under £7,000 and £10,000 to be worse off.

How much better or worse off are we after removal of the 10p rate, but dropping the 22p rate to 20p? See the table below for income 2008/09 before the change and 2008/09 after the change.

The good news, most tax payers who are not in the 40 per cent bracket will be £120 better off.  The money will be paid in one £60 instalment in September, and then in monthly £10 instalments.

Of course this represents a big change of mind from the chancellor, and there is a queue of politicians and media waiting to put the boot in.

But they may have overlooked a key point.

In many ways yesterday’s announcement was not dissimilar from the tax credits being handed out in the US – the main difference being scale.  In the US many individuals will be receiving $600, couples $1,200.

Tax credits are what the UK needs now.   They should be far more effective than cuts in interest rates.  As regular readers of this column will know, rate cuts when borrowing has been too high were once described by Keynes as “pushing on string.”

The snag, though, is the size of these cuts.  A £60 one-off rebate is better than a kick in the pants, but it is hardly worth kissing the air over.   That’s what happens when governments spend too much during the good times.

But the real issue is this.  Why didn’t Gordon Brown up personal allowances in the first place? As we said last month, he could have upped personal allowances by around £1,000, but left the 22p rate alone, rather than reducing it to 20p.  That way, hardly anyone would have been worse off, and the cost to the chancellor would have been small.

Presumably that would have been too easy.