Tax changes – the winners and losers

So just who are the winners and losers of the Government’s 10p tax U-turn?

The winners
Seeing a very welcome injection to their pay packets will be anyone who earns less than around £40,835 a year. They’ll now be better off by £120 in this year.

The Chancellor says that in total 22 million people on low and middle incomes will gain £120, with 4.2 million households receiving as much as, or more than, they originally lost as a result of the scrapping of the 10p tax rate.

“In other words, 80% of households are fully compensated with the remaining 20% compensated by at least half. And in addition 600,000 people on low incomes will be taken out of tax altogether,” Darling said.

The move has also been beneficial for pensioners. Those aged between 60 and 64 were facing an average loss of £100 as a result of the Budget changes, but will now benefit by £120.

“This looks like very good news for pensioners who were set to lose out as a result of the abolition of the 10p tax rate,” says Gordon Lishman, director general of Age Concern.

The changes will be backdated to 6 April and tax payers will feel the benefit of the compensation from September when basic rate taxpayers will get a one-off increase in their income of £60, followed by £10 a month for the rest of the financial year.

The losers
Anyone earning more than £40,835 will see no benefit, as the change actually drags another 150,000 people into the top tax rate net. This is because the threshold for paying the 40% tax rate is cut by £600, although these people will also benefit from the increased personal tax allowance.

Shadow Chancellor George Osborne says around 1.1 million low earners who are on between £6,635 and £13,355 a year will also still be worse off, by up to £112 a year.

Francesca Lagerberg of accountancy firm Grant Thornton backs up this concern.

“While the Chancellor’s plan offers a solution to the political problem, it does not offer full compensation to those worst hit by the abolition of the 10p rate, as there are still some who will spend the 2008/2009 tax year worse off,” she says.

Lagerberg says the fact that a large number of middle income earners will also benefit from the raising of the personal allowance will rub further salt into the wound of those low income earners missing out.