The Budget: Extension of 10p tax bracket will cost £1bn

Income Tax
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Tax cuts were aimed at the lowest paid, by widening the starting band for income tax to the first £1,880 of taxable income, up from £1,520 at present. This increase is bigger than most forecasts, and much higher than inflation - which would have pushed the band up to only £1,580.

Tax cuts were aimed at the lowest paid, by widening the starting band for income tax to the first £1,880 of taxable income, up from £1,520 at present. This increase is bigger than most forecasts, and much higher than inflation - which would have pushed the band up to only £1,580.

While this will benefit 25 million people and cost £1bn a year, the Chancellor decided not to extend personal allowances to take people out of the tax system, a move that could also help millions of the lower paid. Nor did he do anything for higher rate taxpayers, of which there are some 700,000 more than when he took up his office, unless they have children, that is.

The Chancellor's theme was the family. Mr Brown declined to deliver a "give-away" budget of the orthodox kind - a cut of 1p off income tax, say, which would have cost about £2-£3bn. Instead he took off more than 2 per cent off, but only for families with children. Pensioners also did well. The Chancellor promised to increase their personal allowances above the rate of inflation. He reannounced the pension credit that will be introduced in 2003, which is designed to help pensioners who are currently penalised for saving for their retirement.

The Chancellor did nothing to counteract the hidden tax increases he gets through wages increasing faster than inflation. Tax bands usually go up in line with inflation - but wages and salaries tend to rise faster than prices. This means each year more and more people get sucked up into the 40 per cent tax rate. This higher tax rate is then applied to savings income and capital gains and means that people's investment returns suffer as well as their take-home pay.

This swelling army of higher rate taxpayers also adds to red tape, as people are required to tell the Inland Revenue when they have entered the higher band, and to complete a self-assessment tax return. Self-assessment has had considerable teething problems since it was introduced in 1996. Taxpayers are struggling with the increasingly complex calculations, and the Inland Revenue is overwhelmed, leading to a backlog of cases.

The Chancellor reaffirmed how keen the Government was to integrate the Inland Revenue with the social security system, to encourage people to work rather than merely receive benefits. However, the interaction between the Chancellor's enhanced children's tax credit (CTC) and his working families tax credit (WFTC), targeted at the lower paid, has not been publicised.

WFTC is calculated on after-tax income, and CTC will increase this figure for families. Alex Henderson, a tax partner with Arthur Andersen, observes: "As the Chancellor gives with one hand, he takes away with the other."

Mr Henderson warns there is still a lack of "joined-up-thinking". For example Mr Brown's tax credits will restrict other state benefits such as housing benefit. Mr Henderson concludes: "Gordon has proved true to form with his targeted measures. While any reduction in the tax burden is welcome, many employers and taxpayers will be concerned at the seemingly unstoppable increase in the complexity of the tax and benefit system."

The Chancellor has increased the starting tax band of 10 per cent from £1,520 to £1,880. The 22 per cent rate band has increased by £1,000, so it now applies to income up to £29,400. Everything above that is taxed at the existing higher rate of 40 per cent.

The personal allowance has increased by £150 to £4,535 for those under 65. For pensioners under 75 the increase is £200 to £5,990, while those over 75 will receive an increase of £210 to £6,260. The blind person's allowance has increased by £50 to £1,450 per year.

The capital gains tax (CGT) annual exempt amount for individuals has increased by £300 to £7,500. Commentators expressed regret that the Chancellor had again failed to take the opportunity to increase this exemption significantly, so that most taxpayers could be spared the ever increasing complexity of the capital gains tax regime.

The CTC will be higher than the £4,420 the Chancellor announced last autumn. When introduced in April it will be £5,200. However, this relief is restricted to 10 per cent, which means that your tax bill will only be cut by £520 a year. The inheritance tax threshold increased by £8,000 to £242,000.

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