Chancellor Alistair Darling has caved into pressure from backbench Labour MPs to recompense low earners who suffered a loss in take home pay, due to the scrapping of the 10p tax band at the start of this tax year.
The Chancellor has announced that he will raise the personal tax allowance by £600 to 6,035, so that every basic rate taxpayer will pay £120 less tax this year.
He is also raising the 40p rate threshold so that higher earners’ tax bills will not be affected, saying that the change was the “fairest and most effective way” to help those who lost out from the scrapping of the 10p tax rate.
This means that 22 million people on low and middle incomes will gain an additional £120 this year - with a £60 lump sum paid in September pay packets, plus £10 a month for the following six months until the end of the 2008-09 year.
“At a cost of £2.7bn, I will increase the individual personal tax allowances by £600 to £6,035 for this financial year, benefiting all basic rate taxpayers under the age of 65,” he said.
Around 4.2m households will receive as much or more than they lost when the 10p starting rate of tax was scrapped. The remaining 1.1m households will see their loss at least halved.
The Chancellor added: “In other words, 80 per cent of households are fully compensated, with the remaining 20 per cent, compensated by at least half. In addition, 600,000 other people on low incomes will be taken out of income tax altogether.”
But Francesca Lagerberg of accountants Grant Thornton said that low income earners on £7,455 will still be £32.40 worse off at the end of the 2008-09 tax year, despite the changes.
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