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The 10p tax squeeze

Simon Donohue
8/ 4/2008

MINISTERS have come under increasing pressure to rethink scrappping the lowest 10p rate of income tax from yesterday.

A Treasury Select Committee warned that the main losers could be deprived of as much as £232 a year and that households without children or anyone over the age of 65, and on incomes of under £18,500 a year, will suffer most.

So how did we get here?

Gordon Brown's last budget as Chancellor in 2007 saw him announce that he would be "modernising the personal tax system" with a new regime which began at the start of the new tax year this week. The most significant changes were the abolition of the 10 per cent starting rate for tax and the introduction of a new basic rate of 20 per cent. There is no change to the 40 per cent rate.

Err, sorry, lost you there.

Well, up until Saturday night, the tax you paid went something like this: You paid no tax on the standard Personal Allowance of £5,225; 10p in the pound on the next £2,230 in earnings; 22p in the pound between £2,231 and £34,600 in additional earnings; and 40p in the pound for additional earnings over £34,600.

From this week, the standard Personal Allowance is £5,435; you pay 20p in the pound for the next £36,000; and 40p in the pound for all earnings in addition to your personal allowance of over £36,000.

So am I better or worse off?

That depends on your personal circumstances. Figures given in a parliamentary answer to Frank Field MP show the two tax rate changes will result in higher tax for 5.3 million households. Many of the losers are the people earning £15,000 a year or less who will now pay 20 per cent, rather than 10 per cent in taxation for all earnings above the Personal Allowance.

People who earn in the region of £7,000 or £8,000 a year will be worse off by around £250. Those who aren't able to offset the losses by claiming tax-related benefits for dependant children are seen as the worst-hit victims of the change.

Is there any good news?

Not much. Child benefit, state pensions and tax credits are all going up, which means that some tax payers will see improvements in the amount of money they have left after the Treasury has taken its share. But the overall increase in the cost of living - higher mortgage payments, more expensive utility bills, dearer shopping bills, etc - mean that anything additional income is likely to be swallowed up.

Anything else I should know?

Yes, your next payslip will also show an increase in National Insurance payments.

There are also changes to the taxes applied to savings, so be sure to give your building society book a spring cleaning.

Oh, and changes to the tax rate will also mean a reduction in the relief that the government allows to people paying into a company pension scheme.

Is there anything I can do to soften the blow of all the bad news?

Tighten that belt and make sure that you are receiving all of the tax benefits that you are entitled to by contacting the Inland Revenue and reappraising them of your situation.

And if you're lucky enough to pay tax at the top 40 per cent rate, you might also consider moving overseas, where there are many far more favourable tax regimes for the highest earners.