Are you a 10p tax threshold winner or loser?

By MoneyhighStreet Staff. Published on April 22, 2008 This post currently has no comments.

Family calculates tax The last budget included controversial plans to scrap the ten percent tax threshold. Backbench Labour MPs are challenging this decision, however do you win or lose from the abolition of the 10p tax band?

Gordon Brown introduced the 10 percent tax threshold to help low earners, however in a stroke, Alistair Darling, the current Chancellor, has abolished it in the last budget. The Chancellor also announced the lowering of the next tax band from 22p down to 20p, but it is the loss of the 10p tax band that is concerning some backbench Labour MPs the most.

As usual, any change to tax bands and thresholds creates winners and losers, depending on personal circumstances. The government estimates that 2 out of 5 people will benefit from the threshold changes, whereas only one out of five (20 percent) will be worse off. This statistic hides the fact that 20 percent of tax payers means around 5 million people will be worse off as a result.

10p tax band losers

Working tax credit eligibility largely determines if you are a winner or loser. As this strikes at the heart of Labour policies to help the low paid, it is this that is triggering discontent amongst some Labour backbenchers.

If you are too young to receive working tax credits (under 25) and earn less than £18,000, then you will now pay more tax.

If you are a part time worker working less than 30 hours a week, which is the threshold for working tax credits, you will also pay more tax now.

10p tax band winners

The winners under these new tax rules are mainly middle earners with salaries in the £19,335 to £40,000 range. It is mainly the lowering of the 22p tax rate to 20p that reduces the tax for these people.

If you are retired, but earn less than £18,000, then you will also be a winner as your age related personal allowances have increased substantially.

If you receive child tax credits and earn less than £18,000 then you will also pay less tax from now on.

It will be interesting to see if the backbench rebellion can force Alistair Darling and Gordon Brown to change the decision to scrap the 10p tax band. With it hurting so many traditional Labour supporters, there may be sufficient political pressure to force a rewrite of the budget, particularly with the imminent local elections in May.

More likely, though, is some sort of compromise to appease the rebel MPs. If you are now paying more tax after the last budget then you probably hope that a solution can be reached quickly.

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