If you have a low income it is possible you have lost out by the abolition of the 10p starter rate of income tax. So the current row about recent changes may affect you. But how?
According to the respected and non-partisan think tank the Institute for Fiscal Studies (IFS)
The impact of Mr Brown’s income tax changes on an individual taxpayer goes as follows: last year people under 65 paid no income tax on the first £5,225 they earned, 10% on the next £2,230, and 22% on the next £32,370; this year they will pay nothing on the first £5,435 and 20% on the next £36,000.
Taken in isolation, this means that people on incomes between £5,435 and £19,355 this year would be worse off, because they lose more from the abolition of the starting rate than they gain from the cut in the basic rate. The loss is greatest at £232 a year for someone earning £7,755.
Most people on incomes between £19,355 and around £40,000 would gain noticeably from the reform, with the biggest gain of £337 a year at £36,140.
However, that is not the end of the matter. Gordan Brown simultaneously made changes to tax allowances, Child Tax Credit and Working Tax Credit that go a long way to compensate people on lower incomes who have lost out - or they would if people claim everything they are entitled to.
So taking the whole budget package into account, and assuming everyone goes through the rigmarole and claims means-tested tax credits, how does the picture change?
The IFS again:
Roughly one family in five loses; two in five gain and the rest are unaffected.
Most of the losers are of two sorts. First, childless single people who do not qualify for the working tax credit because they [...] work less than 30 hours a week, or earn too much.
Second, childless couples who lose twice from the income tax changes, but gain at most once from the working tax credit because it is a family payment rather than an individual one.
Another vocal category of loser is early retirees, who do not receive tax credits, but who are too young to benefit from the increase in the tax allowance for those aged 65 and over.
The IFS goes on to make various recommendations about how the policy can be changed at this late hour. Some concessions are likely with local elections coming up and a revolt of Labour MPs in the offing. But the moment it is too early to say exactly what the final outcome will be.
One fact though is clear. The way the tax system is changing it is becoming increasingly important for people in work to claim things like Working Tax Credit and Child Tax Credit. Far from being welfare benefits separate to the tax system, the government is increasingly making them part of normal taxation. If you don’t claim you are in effect paying tax at the wrong rate, and losing money.
LATEST from BBC on 10p tax rate row
Full IFS article on abolition of the 10p starting rate
PRIME guide to how to claim Working Tax Credit
Neat tax calculator to check roughly what you pay
Listen to this item
STOP PRESS: APPLICATIONS HAVE NOW CLOSED.
