£120 for basic rate taxpayers

15 May 2008

Chancellor Alistair Darling has increased the personal tax allowance by £600 from £5,435 to £6,035 meaning all basic rate taxpayers will be given an extra £120 this financial year.

The move, which will cost the government £2.7 billion over the course of the year, has been made to help those at a loss as a result of the abolition of the 10p tax rate.

At the same time, the Chancellor has decreased the threshold at which taxpayers start to pay tax at the 40p rate so that higher earners do not gain from the changes.

Workers will now start to pay tax at the 40p rate when they earn over £40,835 instead of £41,435 but because of the increase in the personal allowance they will not end up paying more tax over the 2008/09 financial year.

According to the Chancellor, 22 million people on low and middle incomes will benefit from an extra £120 in their pay packets this year.

The money will be paid as a £60 lump sum in September followed by £10 a month for each month up until April 2009.

When the 10p tax rate was abolished, 5.3 million households found themselves at a loss from the previous year. The changes made by the Chancellor will mean that 4.2 million households will get back as much or more of the amount lost because of the changes.

“The remaining 1.1m households will see their loss at least halved,” added Mr Darling.

“In other words, 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 income tax altogether.”

Unfortunately, the 20% of people who will not receive full compensation were those who were hardest hit by the changes in the first place – those earning just over £8000.

The £2.7bn has been borrowed by the government to avoid taking money from the economy while it is slowing.

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