Personal tax allowance up by £600

Alistair Darling has addressed the controversy sparked by the abolition of the 10p tax band.

The Chancellor today announced in the Commons that the personal income tax allowance will be raised by £600, to £6,035, for the 2008-2009 financial year.

This one-off measure, brought forward from the autumn's Pre-Budget Report and expected to cost £2.7 billion, is an effort to compensate low-income and middle-income households that lost out in this year's Budget by an average of £120 each.

Mr Darling said that 22 million people adversely affected by the end of the starting rate of tax 'will gain an additional £120', while 4.2 million households 'will receive as much - or more than - they originally lost, and the  remaining 1.1 million households 'will see their loss at least halved'.

'In other words', he added, '80% of households are fully compensated, with the remaining 20% compensated by at least half — and, in addition, 600,000 people on low incomes will be taken out of tax altogether'.

The increased personal allowance will apply to all income for this tax year and will be backdated to 6 April 2008.

'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,' the Chancellor announced.

He then addressed the matter of higher rate taxpayers by saying he would reduce by £600 the threshold at which an individual begins to pay at the top rate of income tax.

In his statement to ministers, Mr Darling said he had considered other ways to settle the row over the abolition of the 10p band, including a one-off rebate or compensatory payment, or changes to the tax credit system.

However, he added that further study led him to believe that a rebate scheme would be 'complex and expensive to administer [and would] take time to set up, [while] changes to the eligibility for tax credits could not be introduced this year'.

A rise in the personal allowance, claimed the Chancellor, was the 'fairest and most effective' solution.

Categories: News , Income Tax