Page last updated at 12:34 GMT, Monday, 1 September 2008 13:34 UK

Millions due to gain tax rebate

By Joe Lynam
Business reporter, BBC News

John Whiting explains why basic rate taxpayers are receiving the rebate

New tax measures come into force this month that should see about 22 million people receive a rebate of around 60.

It all stems from the U-turn by the chancellor on plans to scrap the lowest 10 pence tax band, following pressure from backbench MPs to ease its impact.

The new measures will mean basic rate taxpayers see a tax saving of 120.

They will have 60 less taken from their September pay packets and will then see their net pay rise by 10 per month for the rest of this tax year.

The effective cash-back comes because personal allowances for basic rate taxpayers go up by 600 to 6,035 from 7 September.

Self-employed taxpayers will not feel the benefit until they start paying tax from January 2009.

But so far the tax changes only apply for this financial year.

Good news?

Critics of Chancellor Alistair Darling's U-turn say that these tax rebates will also benefit middle-income taxpayers as much as those on smaller incomes.

Taxpayers with another 60 in their pocket may well go out and spend it.
Chris Jones
Tax advisers Lexis Nexis

It will also punch an estimated 2.7bn hole in the national finances as Britain faces a deep economic downturn.

"When the chancellor put this budget together he wasn't expecting to lose 2.7bn, but I'm sure when he re-jigged his numbers, he will take account of this extra money," said Chris Jones of tax advisers Lexis Nexis.

"However, what we need to bear in mind, it could be good news for the economy.

"Taxpayers with another 60 in their pocket may well go out and spend it. That could increase High Street profits.

"So it could in some way balance it [the cost of the rebate] out, but probably not to the full amount."

The 22 million people who are supposed to benefit from this change are the basic rate taxpayers who pay tax at a rate of 20% and whose incomes are below the threshold for paying the higher rate tax of 40%.

This is far more than the 5.3 million people originally estimated to have been paying more tax now that the 10p tax rate has been abolished.

Higher earners

The 10p tax band was scrapped by Gordon Brown in his final budget as chancellor before becoming prime minister last year, at the same time as he cut the standard rate of income tax from 22% to 20% from April this year.

The 60 rebate is due to arrive this month

As it became clear that this would still leave millions of the lowest paid worse off than before, the government was forced in May to change its policy.

To offset the negative effect of abolishing the 10p tax rate, Chancellor Darling announced that the personal tax allowance would be increased by 600 to 6,035.

To stop higher rate tax payers also benefiting, the starting point for the 40% tax rate has been cut by 600.

At the start of this tax year, the higher rate began at an income of 41,435.

This would have been pushed up to 42,035 as a result of the 600 personal allowance increase, but will now start at 40,835 instead.

These changes to the personal allowance, and the adjustment for higher rate tax payers, initially apply only to the rest of the current tax year.

Employees who look closely at their pay slips will see the changes made by alterations to their personal allowances and their tax codes.

Mr Darling has yet to decide if, in his Pre-Budget Report this autumn, he will make any further changes to personal tax allowances next year or simply leave things as they are.

Your comments:

I'm going to invest in some US dollars for my holiday next year before the exchange rate gets any lower!
Rick Dye, Mansfield

It's just enough for a curry and a couple of cobra beers for two at the local Tandori.
Robert Pinckney, Warlingham, Surrey

The extra 60 will no doubt be put towards the increase in my energy costs. It is very unlikely that it will make it to the high street.
Geoffrey Guy, London

I've just found out that I should be able to get up to 40% off a new bike using the Government's Ride2Work scheme, so I can use the extra tax benefit to pay for a helmet and lights.
Graham T, Basingstoke

Well, my car is due for a service and MOT at the beginning of next month, so that will help.
Steve Sutton, St Albans

As I am an old age pensioner I will save the money to help pay my extra heating costs this winter.
William Dixon, Clacton-on Sea

I'm really happy to read about this. I'm going to be spending the money on my birthday this September. Great news!
Akshatha Veerendra Kumar, Edinburgh

I'm planning to buy more stuff on Ebay!
Jacko, Swindon

I will definately be spending my 60. I am 18 years old and make about 12,000. This means I was one of the people affected by the original decision to cut the 10p tax rate in the first place so why not, might as well have some fun!
Garry, Edinburgh

I'm going to give mine back to the government by buying a tank of petrol for my car!
Matt, Iver

I will be using my 60 along with any other savings to put towards a deposit for a house - let's not forget most of us will need 40k, so I don't think I'll be rushing down the pub with it (in reality, I might be)!
Bianca, Cardiff

I will be spending my extra 60 on holiday in Portugal. I go the day after my September pay day so it couldn't have come at a better time with everything else being so tight at the moment!
Lynn, Liverpool

I will have to wait and see if this applies to me. If so, it will ease the pain of the first payment for the new car or at least cover most of a month's petrol!
Andrea Marshall, Killyleagh

I think I'm going to recklessly spend my tax bonus and then borrow lots more money because I am a very prudent chap indeed.
Ed, Leicester

I'm planning to put it towards christmas presents and treat my daughter.
Deena, Gloucester

Ministers see off 10p tax fight
01 Jul 08 |  UK Politics
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28 Jun 08 |  UK Politics
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04 Jun 08 |  UK Politics
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21 May 08 |  Business

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