Page last updated at 14:06 GMT, Monday, 21 April 2008 15:06 UK

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?

Alistair Darling
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

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."




SEE ALSO
Tax changes: Winners and losers
21 Apr 08 |  Business
Darling: I can't rewrite Budget
20 Apr 08 |  UK Politics
Miliband urges party unity on tax
20 Apr 08 |  UK Politics
Downing St denies 10p tax rethink
19 Apr 08 |  UK Politics
Labour tax revolt gathering pace
19 Apr 08 |  UK Politics
MP decides not to quit government
17 Apr 08 |  UK Politics
Pressure mounts over tax changes
08 Apr 08 |  UK Politics

RELATED INTERNET LINKS
The BBC is not responsible for the content of external internet sites


FEATURES, VIEWS, ANALYSIS
Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit

BBC iD

Sign in

BBC navigation

Copyright © 2020 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.

Americas Africa Europe Middle East South Asia Asia Pacific