Basic rate taxpayers will see their personal allowances increase by £600 this year, under measures announced by chancellor Alistair Darling to compensate those hit by the 10p tax rate axing.
The move follows fierce criticism that the decision to scrap the 10p tax rate in last year’s Budget would hit the UK’s lowest earners the hardest.
In a statement to Parliament, Darling said the move would help offset the average loss of £120 per household.
He said that a rebate scheme to those affected would be too “complex and expensive”.
Darling proposes increasing the individual personal tax allowance by £600, bringing it to £6,035, for this financial year. The move, which will cost £2.7 billion, should benefit all basic rate taxpayers under the age of 65.
The government estimates that 22 million people will benefit from an additional £120 a year. However, 20% of households – around 1.1 million - will only see their loss halved.
Darling says: “My proposal for this year will not only help those on low incomes who lost out, but also does more to help all basic rate taxpaying families at a time when oil and food prices have been rising in every part of the world.”
The £600 increased personal allowance applies to those paying tax at a higher rate, as well as basic rate taxpayers. Darling says the threshold for higher rate taxpayers will therefore decrease by £1,200 to stop higher rate taxpayers benefiting financially from the measures.
The changes were originally intended to be introduced in the pre-Budget in the Autumn, but Darling has brought forward the proposition to avoid further criticism being levied at the government.
Mark Wallace, campaign director at TaxPayeyers Alliance, says the move doesn't go far enough to compensation those impacted by the abolished 10p tax rate.
"There are over one million people who will still be worse off despite the increase in personal allowances, and many of them will be some of the most vulnerable in the UK," he adds. "In the long-run, all taxpayers will have to foot the bill for the £2.7 billion used to fund the compensation so in reality not a penny has been taken off the tax burden facing households in the UK."
Brendan Barber, general secretary of the Trades Union Congress, says: "The route Darling has chosen has the merit of simplicity, as it is based on straightforward changes to tax allowances, rather than new complexities.
"[...] But this will have to be paid for, and the chancellor should move to close the loopholes that the super-rich use to avoid tax, rather than take it from hard pressed public services or the pledge to end child poverty."