Darling's 10p tax options

Analysis By Brian Wheeler Political reporter, BBC News

Chancellor Alistair Darling has hinted at future help for the estimated 5.3 million low paid workers hit by the abolition of the 10p tax rate - but how much room for manoeuvre does he actually have?

Mr Darling is working on proposals to offset the impact of the tax changes

Bringing back the 10p rate, most experts argue, is a non-starter.

It would cost �7bn - money the government does not have.

"It is very difficult," says Mike Brewer of the Institute for Fiscal Studies (IFS).

"The losers are coming about because the government made a fairly complicated series of changes to income tax and, really, the only way to compensate them is to undo that change.

"And that is politically infeasible as well as unaffordable."

The government tried to reduce the number of losers when it introduced the changes last year, through reforms to the tax credit system.

Childless people

But as with most of its tax and benefit policies since 1997, the help was targeted at families with children, who if they earn between �19,355 and about �40,000 a year are likely to be slightly better off, and pensioners.

If you have got no children and you are not yet retired you probably haven't gained much out of the Labour government's tax and benefit changes Mike Brewer, Institute for Fiscal Studies

But 5.3 million households, including childless single people on very low incomes, were left worse off.

Early retirees, who do not receive tax credits, but who are not old enough to benefit from the increase in tax allowances for the over 65s, were also among the losers.

This is consistent with Labour's approach since coming to power in 1997 - the poorest tenth of the population have gained by 12% on average through tax and benefit changes, with pensioners gaining 24% and families with children gaining 18%.

But childless people of working age have gained just 1%, according to IFS analysis.

"It has tended to be the case that if you have got no children and you are not yet retired you probably haven't gained much out of the Labour government's tax and benefit changes." says Mr Brewer.

But with Labour being accused by many of its own MPs of hitting the lowest paid in society, the government is under pressure to compensate the losers.

Expensive

One option the Treasury is said to be considering is raising the personal allowances people can earn before they start to pay income tax and National Insurance.

EFFECTS OF TAX CHANGES Winners: Most people/ with incomes of �18,000+ Under �18,000 but aged 65+ and therefore eligible for higher personal allowances Under �18,000 but with young children and therefore eligible for child tax credits Losers: Under �18,000 and ineligible for working tax credits because under 25 Retired early and therefore ineligible for higher personal allowances Part-timer working insufficient hours to qualify for tax credits Different personal circumstances may affect final amounts Source: PWC Tax changes explained Clarke attacks Balls

But that could prove expensive.

Increasing personal allowances by �100 would remove 1.3 million losers and cost �800m, according to the IFS.

Raising the threshold by �300 would remove 3.3 million losers and cost �2.5bn and raising the threshold by �750 would remove nearly all of the losers, but cost �6bn.

Another option is to reinstate the 10p tax rate, but only for those whose income is low. However, once it goes above a certain level it would have to be clawed back, making it administratively complex.

A third option would be to widen the scope of the tax credit system to include younger people without children.

At the moment, if you are childless you have to be over 25 and working for more than 30 hours a week to claim tax credits.

'No perfect solution'

To scrap those parameters - extending tax credits to under 25s without children - would cost �2.2bn and remove 1.2 million losers, according to the IFS.

Raising the working tax credit for childless people by 50% would cost about �600m but would only remove 300,000 losers, the IFS calculates.

The problem for Labour MPs facing calls for action from angry constituents is that any changes will not happen until next year's Budget at the earliest.

John Whiting, a tax partner at PriceWaterhouseCooper, said the government is unlikely to find a package that will please everybody.

"At the end of the day, you do wonder if the only perfect solution, which is administratively impossible, is if we are all invited to march into the revenues office and prove how much we have gained or lost - and then we have potentially got to do it again next year."

E-mail this to a friend

Printable version