Axing of 10p tax rate meets increasing Labour rebellion

by Money Doctor Friday 04 April, 2008

Criticism has come from the direction of more than 20 labour MPs after what they see as a government failure to properly protect poor families from the impact of next weeks abolition of the 10p income tax band.

The concern for the reported 5 million poorer households who risk losing out under Gordon Brown's initiative has lead to the signing of a Commons early day motion stating the dismayed feelings regarding the lack of support.

Brown, who cut the basic rate of income tax from 22p in the pound, to 20p in his final budget as chancellor last year grabbed all the headlines with his announcement. But, the cut was made possible, almost in its entirety, by the abolition of the 10p starting rate of income tax which is proving so unpopular.

The income tax changes, which will come into effect on April 6, will leave around 5.3 million families earning between £5.400 and £18,500 worse off, according to the Institute of Fiscal Studies.

The former chancellor has made it clear that many of the families set to lose out will be compensated by increased payments through the tax credit system, however, not all of them will.

Brown, the now Prime Minister, was challenged this week over the issues in an addressing of backbenchers at what has been described as a tense, private meeting of the parliamentary Labour party.

The growing concern has now lead to 26 Labour MPs signing an early day motion that says the tax changes will have "a disproportionate impact on people who can ill afford to be made worse off", with the names of former ministers Janet Anderson and Gisela Stuart amongst the signatures.

Incidentally, the early day motion has acknowledged that it was never the government's intention to make people worse off, but makes it clear, nevertheless, that the angered MPs are "dismayed at the response to the plight of those adversely affected."

The controversy has prompted a response from the government to stress the positive wider impact of the budget.

Jane Kennedy, a Treasury minister, appeared today on the World at One and highlighted the importance of understanding the context in which the changes, that were announced last year, are taking place, as she reminded viewers that the tax simplification created "the lowest main rate of tax for decades".

Ms Kennedy proceeded to talk of the overall changes since 1997, insisting that people were better off: "Even those who lose out because of the reforms in 2007 will have found that on average they are £505 a year, or £9.70 a week, better off overall as a result of the changes that we have introduced since 1997."

According to IFS economist, Stuart Adam, around 40% of households gained from last years tax changes, whilst a similar amount were unaffected, which leaves the remaining 20%, predominantly the poorest, losing out.

"Most of those on incomes below £18,500 will be protected by tax credit changes and tax allowances," he said.

"But still there will be some that won't, and that's actually a fairly large number of people in the end."

The Tories, who are of course rubbing their hands together and making the most of there opportunity to get in on the criticism, are claiming that some families could lose out by as significant an amount as £446 a year.

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