Lower paid facing April tax rise

By Paul Lewis
BBC Radio 4's Money Box

In his last Budget, Gordon Brown decided to scrap the 10p tax rate

More than five million households, many on minimum wage, will be worse off after tax changes that start in April next year.

A small cut in the basic rate of tax is being matched by a bigger rise in the lower rate.

That means more tax will be due from people under 65 earning £15,000 a year or less.

The Treasury confirms the loss but says this group have benefited from other tax changes since 1997.

Rate abolished

The tax changes are part of a simplification announced by Gordon Brown in his last Budget as Chancellor.

The basic rate of tax is being cut from 22p in the pound to 20p, but the lower starting rate of tax, currently 10p in the pound, will be scrapped for income from earnings and pensions.

In effect that change will double it to equal the basic rate.

Figures given in a parliamentary answer to Frank Field MP, show the two changes will result in higher tax for 5.3 million households.

Losing out

One of those affected is Mary, a 63 year-old from Hampshire, who told Money Box on BBC Radio 4:

"The abolition of the 10p band is dreadful - I am on a small income and I will pay more tax.

They are going to be a couple of pounds a week worse off and every penny is accounted for in those income brackets Anita Monteith, of the Institute of Chartered Accountants

"We are still going to have bills rising and I personally will be worse off - there is no way I can make up that shortfall."

Mary will pay around £130 a year more tax - a 17% rise in the amount of income taken from her.

She is not alone - Anita Monteith, tax manager with the Institute of Chartered Accountants told the programme:

"There are a lot of people in that category, 62 or 63 winding down towards retirement.

"They are going to be a couple of pounds a week worse off and every penny is accounted for in those income brackets.

"At the other end of the scale, a student who was earning about £120 a week is going to be about £1 a week worse off after the change."

The numbers

Analysis of the figures shows that anyone under 65 who earns up to £15,075 a year will pay more tax from April.

For someone under 65 on a pension the tax loss goes up to an income of £16,505.

The maximum loss is more than £180 a year.

Many of those affected will be earning the minimum wage of £5.52 an hour.

Who will gain?

People over 65 are not affected - they get a higher tax allowance which protects them from the changes and all of them will pay less tax from April 2008.

The Treasury admits that some people on lower incomes will be worse off, but says the majority of taxpayers will gain from the changes.

In a statement it said:

"Changes to the tax and benefit system since 1997 have delivered most benefit to those at the bottom of the income distribution.

"Once the Budget reforms are implemented, households will, on average, be £1050 per year better off than under the 1997 tax and benefit system."

BBC Radio 4's Money Box was broadcast on Saturday, 1 December 2007 at 1204 GMT.