Income tax: they took my idea!

Today the Chancellor finally announced what the measure would be to compensate people who have lost out due to the income tax changes. They are going to give all basic rate taxpayers an extra £120 by raising the personal tax allowance by five times that amount. That was the solution to the problem that I suggested nearly two weeks ago.

I’m glad the government have seen sense, and are rectifying their mistake in this way, rather than introducing some new, complex system of benefits or credits. They are also adjusting the 40% tax band so that higher-rate taxpayers won’t receive extra money. However, they aren’t going to lower the threshold so as so bring enough people into the band to pay for the tax cut at the lower rate. Instead, the tax cut is going to cost £2.7 billion.

Ominously, the BBC report that people will gain £120 this year. We should be under no illusions that this will be a permanent tax cut. Next year, the personal allowance won’t increase nearly as much as it would have done, and over time, further reduced increases in the allowance will mean that the £2.7 billion is eventually clawed back. But as no-one can know what the increases would have been without today’s announcement, they won’t be able to complain about losing out. The amount of tax collected will be the same in the end, but I suppose at least low earners won’t be hit with a big increase in tax all at once.

Unfortunately for the Labour Party – and Brown and Darling in particular – I don’t think this measure will do anything for their electability. They are already badly damaged by the original policy error. Maybe a change in leadership is needed before the next election.

3 responses to “Income tax: they took my idea!”

  1. Tax Changes: The Aftermath | Money Watch Pingback

    […] interesting point was made by Jonathan Rawle on his blog: Ominously, the BBC report that people will gain £120 this year. We should be under no illusions […]

  2. Roy

    I do not understand the euphoria over this. People are still loosing out, such as my wife and a number of her friends. All have income that, just by a few pounds, takes them over the £2230 limit of the 10% band. On the first £2230 of taxable income they used to pay 10% = £223. Now they are paying 20% = £446. I don’t see that £120 is fair compensation for this monumental bungle by Brown and Darling.

  3. Jonathan

    You have to take the changes in National Insurance contributions into account too. When these are included, no-one lost more than £150 when the 10% band was scrapped. This graph shows the change in take-home pay (before the recent “fix”) when tax and NI are both considered:

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