Tax sweetener to offset 10p rate outcry

May 14 2008 by Adrian Pearson, The Journal

CHANCELLOR Alistair Darling yesterday announced £2.7bn worth of help for low and middle-income workers hit by the scrapping of the 10p income tax rate.

In a surprise move greeted by loud Labour cheers, Mr Darling told the Commons he will increase personal tax allowances by £600 this year, funding the handout through additional borrowing.

The change, backdated to April 6, will benefit more than 22 million workers by up to £120 and fully compensate 80% of the 5.3 million who lost out from the abolition of the 10p rate.

But 1.1 million of the lowest-paid workers – earning between £6,500 and £12,800 annually – will still be worse off as the increased allowance is worth as little as half of their losses.

Mr Darling said it was the fairest and most effective way to help those who lost out from changes announced in Gordon Brown’s final Budget as Chancellor last year which came into effect in April.

The decision was welcomed by unions, while the leader of Labour’s backbench tax rebellion, Frank Field, said it should put an end to this issue.

But Conservatives described it as a humiliation and accused the Chancellor and Mr Brown of panicking ahead of next week’s crucial by-election in Crewe and Nantwich.

Voter anger over the 10p rate was a key factor in Labour’s mauling in the May 1 local elections and Tories have made it a central feature of their campaign to capture the Cheshire seat.

Mr Darling told MPs that the one-off measure, in the Finance Bill going through Parliament, will see personal income tax allowances increased from £5,435 to £6,035 this year, taking some 600,000 people out of tax altogether.

More than 22 million people will receive a one-off payment of £60 in September followed by £10 monthly for the rest of the financial year.

The gainers include 17 million basic-rate taxpayers who did not lose out at all from the loss of the 10p band.

The threshold for the upper rate of income tax will be reduced from £41,435 to £40,835, so that those earning above this level will see no change in their take-home pay.

Treasury officials rejected Tory claims that the tax change amounted to a mini-Budget, and declined to say whether the extra borrowing would breach the Chancellor's own rules.

With the Prime Minister looking on, Mr Darling told the Commons: "The change that I am announcing today represents the fairest and most effective way to help all those affected as a result of the changes proposed last year.

"In addition, this family tax cut provides support this year for those on middle incomes at a time where they face increased bills, so supporting the economy."

But his Tory shadow George Osborne retorted: "This sounded less like a considered statement from a Chancellor and more like a cynical Press release in a by-election campaign.

"This divided, dithering and disintegrating Government are panicking in the face of the Crewe and Nantwich by-election."

Lib Dem Treasury spokesman Vince Cable said the Government’s tax policy had descended into a complete farce.

More than £2bn of the extra money would go to people untouched by the 10p tax change, while those worst affected would not be compensated in full, he said.

"The Chancellor is desperately trying to backtrack from the disastrous decisions of the Prime Minister but still hasn’t managed to get it right."

Mr Darling’s initiative was warmly welcomed by Mr Field.