Darling ends 10p tax dilemma with £2.7bn for low and middle earners

but 1m will still be worse off, 17m will be better off, and 150,000 will become higher-rate payers

By Andrew Woodcock

Published:

SO GLUM: Chancellor Alistair Darling, left, with Prime Minister Gordon Brown at his side during the Commons announcement

SO GLEEFUL: Tory leader David Cameron, left, and shadow chancellor George Osborne show their delight at the climbdown

Chancellor Alistair Darling announced £2.7billion worth of help yesterday for low-paid and middle-income workers hit by the scrapping of the 10p income tax rate.

In a surprise move greeted by loud Labour cheers, Mr Darling told the Commons he would increase personal tax allowances by £600 this year, funding the handout through additional borrowing.

The change, backdated to April 6, will benefit more than 22million workers to the tune of up to £120 and fully compensate four-fifths of the 5.3million who lost out from the abolition of the 10p rate.

But 1.1million of the lowest-paid workers – earning between £6,500 and £12,800 annually – will still be worse off, as the increased allowance is worth as little as half their losses.

Mr Darling said it was “the fairest and most effective” way to help those who lost out from changes announced in Gordon Brown’s last Budget as chancellor last year, came into effect last month.

The decision was welcomed by unions, while the leader of Labour’s back-bench tax rebellion, Frank Field, said it should “put an end to this issue”.

Humiliation

TUC general secretary Brendan Barber said the chancellor had “done what he had to do to undo the damage caused by the abolition of the 10p tax band”.

But Tories described it as a “humiliation” and accused Mr Darling and Mr Brown of panicking in advance of next week’s crucial by-election in Crewe and Nantwich.

Voter anger over the 10p rate was a key factor in Labour’s mauling in the May1 local elections, and Tories have made it a central feature of their campaign to capture the Cheshire seat.

Mr Darling told MPs the one-off measure, to be introduced in the Finance Bill currently going through parliament, would increase personal income tax allowances increased from £5,435 to £6,035 this year, taking some 600,000 people out of tax altogether.

More than 22million people will receive a one-off payment of £60 in September, followed by £10 monthly for the rest of the financial year. The gainers include 17million basic-rate taxpayers who did not lose out at all from the loss of the 10p band.

The threshold for the upper rate of income tax will be cut from £41,435 to £40,835 so those earning above this level will see no change in their take-home pay. Some 150,000 people will be moved into the upper band as a result.

Lib Dems said the additional spending would increase net government borrowing to £45.7billion – a 6% rise from the total predicted in the Budget two months ago and 50% up on last year’s estimate.

With the prime minister at his side, Mr Darling told the Commons: “The change that I am announcing today represents the fairest and most effective way to help all those affected as a result of the changes proposed last year.

“In addition, this family tax cut provides support this year for those on middle incomes at a time where they face increased bills, so supporting the economy.”

But his Tory shadow, Geor-ge Osborne, said: “This divided, dithering and disintegrating government are panicking in the face of the Crewe and Nantwich by-election.” Lib Dem Treasury spokesman Vince Cable said the government’s tax policy had “descended into a complete farce”.

Mr Darling’s initiative was welcomed by Mr Field, who had been threatening to revive the back-bench revolt over the issue. Mr Field also apologised to Mr Brown for personal comments he had made in the course of his tax campaign.

Speaking in the Commons, the maverick said: “As the prime minister is in his place, might I also add that over the weekend I allowed my campaign to become personal. I much regret that and I apologise without reservation.”

Mr Brown will now seek to add momentum to Labour’s fightback with a draft Queen’s Speech today including measures to help first-time homebuyers.

The concession received a very guarded welcome from opposition politicians in the north and north-east.

Highland Liberal Democrat MP Danny Alexander claimed the concession was “panic and not principle”. The Inverness, Nairn, Badenoch and Strathspey MP said: “He still owes the country an explanation. Well over a million of the poorest households are still left worse off.”

Dundee East MP Stewart Hosie said: “We must be sure this is not a cynical compensation con. People who saved for their old age, and were hit when the 10p rate doubled, appear to go uncompensated.”