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Scrapping of the 10% starting rate of income tax

This is my second article in a week long series on the key personal tax changes that came into affect in April 2008. For the others, please see the introduction to 2008 tax changes.

10% tax rate abolished

Sunday saw the scrapping of the 10 per cent starter rate (also called the 10p rate) for the first £2,230 of taxable income. The move was introduced in conjunction with a reduction from 22 per cent to 20 per cent on the basic rate of tax on income of up to £36,000 a year.

While everyone with taxable income will be due to pay more tax on the lower portion of their earnings because of the 10% band’s abolition, those on better salaries won’t notice because they’ll gain more from the cut from 22% to 20% than they’ll lose on the 10% band scrapping.

The lower-paid will notice, however. The Institute for Fiscal Studies has said a total of 5.3 million households will see their take-home pay fall as a result of the change, particularly people earning between £5,200 and £18,500. (When your earnings are greater you’ll start to benefit more from the basic rate cut to 20% than you’ll lose on the abolishing of the lower 10% band, while those earning less than £5,435 don’t pay income tax at all).

You can see the Goverment’s website for a detailed picture of personal tax allowances and rates.

Why is a Labour Government taxing the poor?

The Government argues it will make up the shortfall for the lowest paid and vulnerable with child tax credits and other state handouts; people over 65 get higher personal allowances, for instance.

That’s done nothing to stop a row erupting, driven by an unlikely alliance between David Cameron and the more right-wing media, and Labour MPs and other leftwingers who baulk at tax hikes for the poorest workers. There is even confident talk of getting the abolition overturned.

Former Labour front bencher Frank Field argues that tax credits won’t solve the problem for the lower-paid, for example:

On average, lower-paid workers without children can lose around £440 a year. Families with children will be eligible for tax credits, but will still be losers. Thirty-six per cent of eligible families do not claim child tax credit.

The government needs to announce before May 1 that all low-paid working households will receive a lump sum payment, with a higher sum going to households without children. Mechanically, these payments can only be made later in the year but they would do much to restore Labour’s claim of helping decent working families.

Field does not explain how he will determine whether families are ‘decent’ or not, or how much money it’ll cost to administer the lump sum distribution, or how much will get wasted or misplaced… but I’ll leave my mini political rant for the end of the article!

What does it mean for you?

You’ll either pay more tax, or less, depending on what you earn.

There’s nothing much you can do about it, short of protesting or signing a petition, or getting a new job. It’s not like the changes to Capital Gains Tax, whereby the effects are large enough to potentially alter certain investment strategies. People will simply have to fill in their tax forms and settle their bills, or just try and spot the difference in their take home pay every month.

[Warning: Mini political rant begins]

Personally, I think it’s a clumsy change. I’m all for the simplification of the tax system, but that’s hardly what’s being done when the Government is pointing out it will make up the difference by mucking about with tax credits, and so on.

If I were Chancellor for a day, I’d have scrapped the 10% rate, but I’d have scrapped tax credits, too, and instead increased the tax-free personal allowance band to something like £12,000 a year. That would massively assist poorer-paid workers and encourage them to earn more, which I’m all for, without sending them into the enfeebling arms of the state for a handout.

Alas, there’s nothing a politician likes more than being in charge of the sweet trolley.

[Mini political rant ends]

Amusingly the 10% tax rate has only been in existence since 1999, when Gordon Brown himself introduced it to cheers from Labour party colleagues. Its abolition was announced in 2007. There was no explicit mention of it in Alastair Darlings’ March 2008 budget speech, but it survived in the detail, of course.

Note: If you’re losing out as a result of the change in the 10p tax rate, please see if any of these basic steps to surviving the credit crunch could also help you.

Make sure you check out the other key personal tax changes that have come into affect in 2008/09, and do consider subscribing to Monevator.

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