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Darling's tax change could hit under 65s
It should have been a good month for Chancellor Alistair Darling. Most people with a job or a pension will get a tax rebate in September worth up to £60, writes Paul Lewis
But before he could start taking the credit for that move, Mr Darling distracted everyone by revealing to Guardian journalist Decca Aitkenhead that he thought the current world economic conditions were "arguably the worst they've been in 60 years…and I think it's going to be more profound and long-lasting than people thought."
So now we know. We're in a mess. And it is going to go on for a long time. And there is not much we can do about it.
But what about this rebate? When it was announced in May it had two functions. One was to deal with what the Prime Minister admitted had been "a mistake" when he scrapped the 10% rate of income tax, but apparently failed to notice that would leave more than five million people on low incomes paying up to £181 more tax this year than they did last. The tax rebate will slash the number of losers to one million and limit their losses to no more than £61 in the year.
But the second purpose of the change was to give a boost to the economy. Most of the £2.7 billion spent on raising the personal tax-free allowance will go to the 17 million basic rate taxpayers under 65 who did not lose out anyway. They were already paying less tax this year than last and now will pay less still. Raising the personal tax allowance will cut their tax by £120 this year. Half of that will be paid as a one-off rebate with pay or pension payments this month. And the rest will come as a £10 cut in tax for the following six months.
It was modest compared to the $100 billion tax rebate which gave most American households $950 this year. But it was intended to do the same job – give people a bit more spare cash which they would then go out and spend, helping to keep businesses going.
But since then we have had the news that the UK economy ground to a halt in the second quarter of 2008. The Office for National Statistics revised down its estimate of growth – which had been 0.2% – to 0.0%. Stagnation. And there is now an even stronger expectation that the economy will go into reverse before long.
So the £2.7 billion cost of the tax change could well prove a very expensive way of leaving more than a million low income people under 65 worse off this year than last. And still not staving off recession.
* Paul Lewis is the editor of Saga Magazine's Money News section and the presenter of BBC Radio 4's Moneybox. Paul's opinions are his own and for general information only. Always seek independent financial advice.
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