Saturday, 17 May 2008

What Gordon did next

Or should that be "How Alistair fixed it for Gordon"?

On Tuesday, the Chancellor of the Exchequer, Alistair Darling, dug the Prime Minister out of a hole and announced the equivalent of a u-turn over the abolition of the 10p tax band. In an "emergency budget", it was announced that personal allowances would be increased by £600 for all taxpayers whilst the starting level for 40% tax band was lowered by £600, so that the net benefit would only be felt by the UK's 25 million basic rate taxpayers who will get an extra £120 per annum in their pockets.

(Cue much dancing and rejoicing in the streets by worried Labour politicians).

So what does this mean? Is it a good thing or not? The devil, as usual, is in the detail.

Firstly, it doesn't take effect until September, so the poorest taxpayers must struggle through until then. They'll get a £60 "bonus" in their September pay packets, followed by £10 a month there-after. Bad thing.

Secondly, does it alleviate the extra tax they will still have to pay? The answer is MAYBE. It depends how you look at it. If you are comparing last year with this year, it can be argued that your taxpayer is better off because the main tax band, the "basic rate" band, has also decreased from 22% to 20%. And then you have to factor in the annual inflation-linked increase in personal allowances...

Let's use a hypothetical low income earner, who earns £11,000 per year and call her Jo Broke . Click on the image to make it bigger.

Jo paid £1,003 in tax last year. If Tuesday hadn't happened, she'd be paying £1,113 in tax this year, an increase of £113. However, because the abolition of the 10p tax band was kept so quiet, Jo would have been expecting to only pay the £890 of scenario 2. Thanks to Tuesday, she's still paying £113 more than she expected, but it's less than last year. I think I'll leave you to draw your own conclusions on whether she has got fair treatment.

And what about the people who earn enough to pay 40% tax? Thanks to Tuesday, they'll be paying an extra £120 in tax this year. Since anyone earning £40,835* or more pays 40% tax on their earnings over that sum, that is a hell of a lot of people who will feel aggrieved come September. Me? I feel aggrieved now.

- Pam

* Let's put a salary of £40,835 into context: it's about 1/6 of the average house price in the UK. In most industries, it's a starting salary for bottom level management.

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