Page last updated at 12:24 GMT, Wednesday, 23 April 2008 13:24 UK

Full text: Chancellor's tax letter

The full text of the chancellor's letter on tax to the chairman of the Treasury select committee, Labour MP John McFall:

I said at the weekend that I wanted to return at the Pre-Budget Report and at the Budget to the issue of helping low-income families affected by the personal tax changes announced in 2007.

On Monday, the Chief Secretary (Yvette Cooper) confirmed that we were taking forward work to look at how we can help families without children alongside the next stage of work to tackle child poverty.

I therefore welcome the Treasury Committee's decision - announced yesterday - to hold an inquiry into the effect of Budget measures on low-income households. I thought it would be helpful to let you know of the work the Treasury has under way in this area.

The 10p rate was introduced in 1999 as a transitional measure to help low income households. However, as the tax credits system became more developed and more generous, we were better able to target resources on low-income households.

That enabled us in the Budget in 2007 to simplify the tax system by removing the 10p starting rate of income tax and reducing the basic rate of income tax from 22p to 20p.

We were also able in that Budget, at a cost to the Treasury of 2.5bn, to increase allowances for pensioners over 65, taking 600,000 pensioners out of the tax system, increase the Working Tax Credit to help low income households and make significant increases in the Child Tax Credit and Child Benefit to support families with children.

And in my Budget in March, we were able to go further through additional increases in the Child Tax Credit and Child Benefit and additional support for pensioners through the Winter Fuel Allowance.

While we have been able to help children and families, pensioners over 65 and many low-paid workers with the extension of the working tax credit, as I said at the weekend, there are a number of other groups we want to do more to help now and in the future.

The removal of the 10p starting rate of income tax will be legislated for in this year's Finance Bill. There are better ways of achieving the purpose of improving the position of those in poverty and to make sure in every decision we take that we help those on low incomes.

The main two groups we now want to do more to help are, first, other low paid workers without children, and, second, pensioners under 65. We have been actively looking at two ways to help these groups - direct payments or changes to the tax credit system.

As I have said, our report and supporting papers will be published in time for the Pre-Budget Report and will focus on the administrative practicalities, costings and speed of implementation.

For pensioners aged 60-64, whose incomes tend to be more stable, we have put in hand work to see if those households who have lost out from the removal of the 10p starting rate of income tax can be helped through the mechanism that already exists to pay the Winter Fuel Allowance.

As a sign of the Government's intent, we do not wish to wait unnecessarily until November. Whatever conclusions we come to, all the changes will be backdated to the start of this financial year.

For other low-paid families currently outside the working tax credit system, while we will examine in our review all practical propositions, our focus is on potential changes to the tax credits system to allow the average losses from the removal of the 10p starting rate of income tax to be offset.

At the same time the Secretary of State for Business, Enterprise and Regulatory Reform (John Hutton) and I have asked the Low Pay Commission to report on what changes could be made to the minimum wage regime to support younger workers. We will look at other measures alongside this.

I will report back to the House in the Pre-Budget Report.

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