May
13
10p Tax Rate: U-Turn with a Flourish
Filed Under Living Expenses, News, Poverty, Tax
Chancellor Alistair Darling today announced that personal tax allowances would be increased by £600, to £6,035 for under 65s, adding a flourish to the u-turn centered on the abolition of the 10p tax rate.
The headline at BBC News Basic rate taxpayers to get £120 misses a point. When the 10p tax rate existed that would have been £60 tax savings. The £120 savings are based on the 20% tax rate no longer being applied. Those on low incomes are still getting mugged, just now they get to wear a nice little hat on their heads as they get coshed. A £600 hat to be precise.
I’d like to think someone read More 180s than the World Darts Championship, though if they had it would have been the full £1,160 increase in the personal allowance and not the £600 increase, which is delayed until September, and refunds. Still with the complicated.
One could be suspicious of the timing of the u-turn, that is apparently going to cost taxpayers £2.7bn, given the recent abysmal showing by Labour in the local elections and the impending by-election in Crewe and Nantwich. A point made by Conservative MP and shadow chancellor George Osborne,
“Let no-one be fooled why you are making this statement today – not because you wanted to…. but because this divided, dithering and disintegrating government are panicking in the face of the Crewe and Nantwich by-election”.
Moreover, the £2.7bn will be financed from borrowing. The rationale being that more debt and incurring huge interest bills, to be paid by the taxpayer now and in the future, doesn’t drain money from the economy while it is slowing. Though the whole idea of draining money from the low-waged while an economy is slowing didn’t appear to concern them when they announced they were abolishing the 10p tax rate.
What this “solution” doesn’t seem to include is all the extra hassle and expense for employers dealing with updating all their records. Apparently, costs incurred by those other than the Government aren’t even worth acknowledging.
Then there are all the new tax tables and updated employer packs which will have to be produced and sent out. How much taxpayer’s money is being wasted there?
As for the low-waged, initial reaction is that they are more confused than ever.
The £120 spoken of in the BBC headline will come in the form of an effective £60 rebate in September and then should equate to £10 a month from then on, assuming you earn enough that is. This should be good news for many on low incomes. However, some of the very lowest earners, including those who don’t have families or work enough hours to claim tax credits, will still end up with less money.
Middle income earners, of which there are about 17 million, should gain. The abolition of the 10p rate coincided with the reduction in the basic rate of tax from 22% to 20%. Therefore, most middle-earners did not lose out from the loss of the 10p band but, like everyone else, they will save the £120 tax that the increased personal allowance provides. This equates to £2bn of the £2.7bn cost, the Institute of Fiscal Studies says.
The upshot of all this is that employees and employers will be less confident about the future. Employers will waste time and money trying to put semi-right what Darling et al made wrong. Those on low incomes will find finances a little tighter, in the near-term at least.
As for confidence in the Government’s ability to deal with the more fundamental problems of an economy heading towards contraction whilst house prices are falling, it is likely that it has been irrevocably damaged.
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