Page last updated at 15:43 GMT, Tuesday, 13 May 2008 16:43 UK

Full statement: Tax changes

Here is the full text of Chancellor Alistair Darling's announcement about changes to the personal tax allowance for basic rate taxpayers.

With your permission Mr Speaker, I would like to make a statement on how I propose to deal, this year, with the consequences of the withdrawal of the 10 pence rate of income tax.

In the Budget last year, my Right Honourable Friend introduced just two rates of tax with the basic rate cut from 22 pence to 20 pence - the lowest rate for 75 years.

At the same time allowances for pensioners over the age of 65 were increased.

And recognising that as the tax credit system became more developed and more generous, we were better able to target resources on low-income households, we increased the Working Tax Credit and the Child Tax Credit as well as Child Benefit.

As a result of those changes over 16 million households have gained. And 600,000 more pensioners will pay no income tax at all.

Because of the changes announced in 2007 and in this year's Budget, half a million children will be lifted out of poverty: a record that no other government has ever matched.

Mr Speaker, in my letter to the Chairman of the Treasury Select Committee three weeks ago, I said I would set our proposals, to help those who lost out as a result of the withdrawal of the 10 pence starting rate of tax for the longer term, at the Pre-Budget Report later this year.

As I said in my letter, my focus would be on changes to offset the average loss of 120 per household and that whatever conclusions we came to, the changes would be backdated to the start of this financial year.

But I also said that I would not wait unnecessarily until November before setting out how we intend to proceed.

Mr Speaker, I said that I would look at the administrative practicalities of other options that some Right Honourable and Honourable Members have suggested, including a one-off rebate or compensatory payment as well as changes to the tax credit system to allow the average losses to be offset.

Having looked at this further, I believe that a rebate scheme would be complex and expensive to administer. It would also take time to set up and changes to the eligibility for tax credits could not be introduced this year.

However, Mr Speaker, I can bring forward a proposal for this year that will offset the average loss and which will provide financial support more fairly, quickly and efficiently than any one-off rebate scheme - providing we legislate for it now in this year's Finance Bill.

For that reason I am proposing to bring forward one measure from the Pre-Budget Report now.

Mr Speaker, I want to help families on low and middle incomes as soon as possible.

But my proposal for this year will not only help those on low incomes who lost out, but also does more to help all basic rate taxpaying families at a time when oil and food prices have been rising in every part of the world.

So, at a cost of 2.7 billion, I will increase the individual personal tax allowance by 600 to 6035 for this financial year, benefiting all basic rate taxpayers under 65.

This will mean that 22 million people on low and middle incomes will gain an additional 120 this year. 17. 4.2 million households will receive as much - or more than - they originally lost. The remaining 1.1 million households will see their loss at least halved.

In other words, 80 per cent of households are fully compensated with the remaining 20 per cent compensated by at least half. And in addition 600,000 people on low incomes will be taken out of tax altogether.

Mr Speaker, people aged between 60 and 64, whose average loss was 100 will also get the advantage of the increased personal allowance worth up to 120.

They also receive the additional 50 Winter Fuel Payment for this year, which I announced in the Budget.

The increased personal allowance will apply to all income for this tax year and so will be backdated to 6 April.

As a result, from September basic rate taxpayers will see a one-off increase in their monthly income of 60 and then an increase of 10 per month for the rest of the financial year.

Mr Speaker, higher rate taxpayers were largely unaffected by the reforms announced last year.

So it is fair to focus this additional support on basic rate taxpayers only.

However, as the 600 increased personal allowance applies not just to basic rate taxpayers but also to those paying tax at a higher rate, I am therefore reducing the threshold at which an individual starts to pay tax at the higher rate by 600.

The net effect of these changes is that the tax liability of everyone that currently pays tax at 40 per cent will be unaffected by the increase in the personal allowance. For those brought into the higher rate, they will gain by up to 120 this year.

I propose to legislate for these changes in this year's Finance Bill so that taxpayers will get the benefit of this change from September.

Mr Speaker, raising the personal allowance is simpler than other solutions.

It retains the benefit of a simpler tax system and it also allows basic rate taxpayers to see the benefits as soon as possible, and for the whole of this financial year.

Mr Speaker, my proposal will also provide additional support for individuals and families for this year, including those on middle incomes who have currently benefited from other reforms announced in 2007. We are providing this support at a time when they are facing additional costs.

I have brought forward this measure from the Pre-Budget Report in order to ensure that people get the benefit as soon as possible. I shall set out proposals for next year and beyond at that time.

Mr Speaker, as I made clear at the time of the Budget it is right and sensible to allow borrowing to rise and investment to be maintained as the economy slows.

Debt is lower than in the past and low by international standards. Our fiscal policy, like our monetary policy, is designed to support stability in these uncertain economic times generated by the turbulence in world financial markets and global commodity price inflation.

I am able to finance this proposal through borrowing this year ensuring that we do not take money out of the economy at this time.

I will, of course, set out my fiscal projections and decisions in the Pre-Budget Report as usual, consistent with the fiscal rules and in line with the requirements of the Code for Fiscal Stability.

For future years our aim is to continue the same level of support for those on lower incomes and I shall bring forward proposals to do this at the Pre-Budget Report.

Mr Speaker, the change that I am announcing today represents the fairest and most effective way to help all those affected as a result of the changes proposed last year.

In addition, this family tax cut provides support this year for those on middle incomes at a time where they face increased bills, so supporting the economy.

And I commend this statement to the House.

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