In a measure which experts described as "redistributive" and "living up to his Robin Hood image", Mr Brown also announced that the 10p rate, the lowest band for 35 years, will apply from 6 April on the first pounds 1,500 slice of taxable income above the personal allowance.
In the dying seconds of his Budget speech, Mr Brown also pledged that the Government would reduce the next tax level from 23 per cent to 22 per cent - the lowest for 70 years - in April next year.
The 10p rate announced yesterday will replace pounds 1,500 of the former 20 per cent rate, which is being completely scrapped. The 20 per cent rate covered the first pounds 4,300 of taxable income, after allowances. However, scrapping the 20 per cent rate means the 23 per cent tax slice (22 per cent in 12 months) is extended downwards.
At the same time, the Chancellor announced that from April next year, employees who are not contracted out of the state top-up pensions scheme, Serps, will see their NI contributions harmonised with the tax regime and raised in two tranches.
The net effect, according to calculations by pay and employment benefits firm Arthur Andersen last night, will be that, taking both NI contributions and tax into account, a single person earning pounds 5,000 a year will be pounds 14.29 better off from April. The net gain remains at roughly that level until pounds 25,000, rising to pounds 22.83 better off on salaries above pounds 35 and beyond.
A married person earning pounds 10,000 a year, and whose married couple's tax allowance is being abolished, will see a net monthly increase in salary of pounds 7.26, rising to pounds 15.50 on earnings above pounds 35,000.
Mr Brown told MPs: "The tax reforms of this Budget provide a better deal for the hard-working majority - a ladder of opportunity for those who want to work their way up, a chance to keep more of what they earn and, for all, a fundamental guarantee that work will pay."
John Whiting, a tax partner at PricewaterhouseCoopers, the accountancy firm, said: "He is being quite clever in the way he disposes of his tax resources. They are clearly being concentrated to help lower-paid people, but without hitting higher income-earners too hard. It is quite transparent. The good thing is that it is being concentrated on low earners. I suppose he is keen to live up to his Robin Hood chancellor image."
As part of the package of tax changes, the Chancellor yesterday announced that the personal tax allowance will be raised by pounds 140 in 1999/2000, to pounds 4,335. For people aged 65 to 74, the additional allowance rises by pounds 310 to pounds 5,720 before tax is payable, and a further pounds 160 to pounds 5,980 for those over the age of 75.
The 23 per cent tax rate, which currently applies on taxable earnings between pounds 4,301 and pounds 27,100, is being extended downwards. The higher tax bracket of 40 per cent will now begin to apply to earnings above pounds 28,000, allowances after, or pounds 32,335 before the single person's allowance.
Mike Warburton, a senior tax partner at Grant Thornton, the chartered accountants, said: "Bringing the 10 per cent tax band forward to April this year was quite a surprise. I can foresee problems in implementing it. Generally the Revenue prefers a lead-in time of a year so that it can get its systems in working order. What is also not clear is what happens to people with savings as a result of this change. In the past, anyone on a 20 or 23 per cent tax rate paid no extra income tax on bank or building society deposits. It is not clear whether they will now pay 20 or 23 per cent."
Graham Duckett, a partner at Millfield Partnership, a firm of independent financial advisers, added that there was also a possibility that income- earners on the new 10 per cent tax rate might still have to pay 20 per cent, or even 23 per cent, income tax on their bank or society savings.
The Chancellor's announcement in the area of NI was seen by experts yesterday as part of the gradual process of harmonising the NI contribution levy with ordinary income tax.
At present, employees paying so-called class 1 contributions face an NI bill of 2 per cent on the first pounds 64 of their weekly income as soon as it reaches that level. Thereafter, NI contribution levels rise to 10 per cent on incomes between pounds 64 and pounds 485 a week. Mr Brown is proposing to alter the system from April, by raising the weekly level on which NI is payable to pounds 66. There will be no 2 per cent on earnings up to that amount.
"I am abolishing the perverse `tax on work', the entry fee every employee has to pay simply to be part of the national insurance system. From this tax cut on work worth over pounds 1.4bn a year, every one of 20 million employees, will gain pounds 69," the Chancellor told MPs yesterday,
Meanwhile, the upper limit on which NI is payable will rise to pounds 500 a week.
In April 2000, the earnings point above which employees pay NI contributions will be raised by pounds 21 per week over two years - from pounds 66 in April 1999 to pounds 76 in April 2000 and then to pounds 87 - the level of the single person's tax allowance - in April 2001.
At the same time, the upper earnings limit, the point above which employees stop paying NI contributions, will be raised by pounds 30 per week to pounds 535 from April 2000 and then by pounds 55 per week from April 2001, to pounds 575 per week.
Mr Brown said: "Our reforms in national insurance will give employers an overall tax cut of pounds 1.5bn and employees an overall tax cut on work of pounds 2.5bn - an average of pounds 130 per year per employee."
Mr Warburton, at Grant Thornton, said yesterday that the net effect of the reforms for most NI contributors would be positive. He added, however, that for someone earning more than pounds 575 a week, the weekly NI burden would rise from pounds 43.28 at present to pounds 48 a week in April 2001, or about pounds 20 a month.
"[The Chancellor] does appear to be in control. This Government has [always] wanted to harmonise the effect of NI and income tax. He appears to be moving towards this goal. He has also concentrated his firepower at the lower end of NI."
For the self-employed, Mr Brown said flat-rate NI contributions of pounds 6.55 per week paid once earnings exceed pounds 72.50 would be cut to pounds 2 a week.
However, in a move aimed at stamping out the growth of so-called "slave companies", set up by self-employed IT workers to cut their NI bills, the Chancellor said the tax will be raised from 6 per cent on profits between pounds 145 and pounds 500 per week to 7 per cent.
At the same time, the lower earnings limit on which NI is payable will be cut to pounds 85 per week and the upper limit raised to pounds 535 and then to pounds 575 by 2001. The effect will be to raise the maximum rate of NI payable from pounds 21.30 to pounds 34.30 a week.Reuse content