22 million set for income tax cut

An estimated 22 million people saw their income taxes cut, Tuesday, as the beleaguered Brown Government sought to put closure on the row caused by the scrapping of the 10p tax band.

Basic rate taxpayers will get an extra £120 this year - the initiative aimed at compensating 5.3 million lower paid workers who suffered after the 10p rate was canned. The move will be financed by an additional £2.7 billion of Government borrowings.

Putting some numbers on it the £120 comes about because the personal allowance has been put up by £600 to £6,035. The money will come via a £60 lump sum in September pay packets, followed by a £10 monthly increase until the end of the year.

Addressing Parliament Chancellor Darling told MPs however that he would lower the level at which 40p tax is paid - hence higher earners won't gain from the change.

Chas Roy-Chowdhury, head of taxation at ACCA (the Association of Chartered Certified Accountants) said the Chancellor's increase in the individual tax allowance by £600 is to be welcomed. Tax payers have been demanding certainty and clarity about this issue, and this is a step in the right direction.

But the downside to this income tax change is that business systems and processes will have to be updated half way through the tax year in September. SMEs represent over 99% of UK businesses, and they will have to change their PAYE codes and tax systems. This is the administrative knock-on effect which happens when policy decisions are altered because they weren't clearly thought through in the first instance.

"ACCA also questions how many tax payers will now be dragged into the higher rate tax band of 40%. Due to these changes, there will now be people who were on the 20% tax band who will be brought into the higher rate because of this £600 decrease in the 40% tax band," Roy-Chowdury added.

Cynics will argue that the Government needs to get its core vote 'onside' ahead of a General Election that may be called as late as May 2010 - Gordon Brown praying that the coming slump will have blown itself out by then.

In the meantime, further strain will be put on the public finances - this on a day when the latest inflation figures not only brought forward the likelihood of Bank of England Governor, Mervyn King, having to write a letter to the Chancellor explaining why inflation has fallen outside the Bank's self imposed range, but also lessening the likelihood of further interest rate cuts in the immediate future.

It also won't have gone unnoticed by the Government that next week's Crewe by election sees the Conservatives in the driving seat, if the pollsters are correct. These are truly desperate times for Gordon Brown.

13 May 2008 © Moneyextra.com

FINANCIAL NEWS - FEATURES - SAVINGS - DEPOSIT ACCOUNTS

Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.