Latest Channel 4 News:
Row over Malaysian state's coins
'Four shot at abandoned mine shaft'
Rain fails to stop Moscow wildfires
Cancer blow for identical twins
Need for Afghan progress 'signs'

FactCheck: how many 10p tax losers?

By Channel 4 News

Updated on 07 July 2009

The 10p tax row comes back to haunt Gordon Brown. How many people are still left worse off by the controversial scrapping of the tax band?

image

The claim

"There's half a million households and probably 1.3 million individuals who are losing out by at least a pound a week [from the scrapping of the 10p tax rate]."
Frank Field MP, Today, Radio 4, 7 July 2009

The background

The row over the10p tax rate - which looked like a serious threat to Gordon Brown's authority last spring - is back on the agenda.

Rebel Labour MP Frank Field tabled an amendment to the budget bill, to be debated today, calling for all of those left worse off by the scrapping of the starter rate of income tax in April 2008 to be fully compensated.

The government put in place a number of compensation packages last year - so how many people remain worse off?

The analysis

Here's a quick recap of the 10p tax saga.

The starter rate of income tax was introduced in Labour's first term of government. The slim band (at time of scrapping, it applied to around the first £2,300 of taxable income) meant that the poorest taxpayers were losing a smaller slice of their earnings in tax than if they had just been taxed at the basic rate of of 22p in the pound.

In 2007, Gordon Brown used his last budget as chancellor to cut the basic rate of tax to just 20p in the pound.

At the same time - and to relatively little criticism - he ditched the 10p rate, saying the government had instead "put in place more focused ways of incentivising work and directly supporting children and pensioners at a cost of £3bn a year".

Get the latest FactCheck news: sign up for the newsletter

Although the lower 20p basic rate of tax would mean those on middle incomes would be better off, the poorest taxpayers - those earning between £5,435 and £19,355 - lost out. They pay tax at 20p in the pound rather than 10p, but don't earn enough to benefit from the 2p cut in the basic rate.

In theory, the hardest-hit person would be earning £7,755, and would lose out to the tune of £232 a year.

Losers weren't spread evenly across the board: Brown increased child tax credits and raised tax thresholds for those aged 65 and over at the same time he announced the end of the 10p tax rate. So it was mostly low-earning younger people without children, and a number of those who retired early, who lost out.

In all, around 5.3 million families around the country - one in five - were left worse off, the Institute for Fiscal Studies calculated.

By April 2008, when the change actually took effect, the new PM found himself in political hot water. Local Labour rebels - led by Field - complained the move betrayed fundamental Labour principles by robbing from the poor to benefit the (comparatively) rich.


'Many people are better off with the basic reforms - but there are still losers'
Mike Brewer, director of the direct tax and welfare research programme

In May 2008, shortly before the Crewe and Nantwich by-election, Chancellor Alistair Darling temporarily increased the personal allowance (the level at which income becomes taxable) for all basic rate taxpayers by £600, at a cost of £2.7bn. This made people up to £120 a year better off, depending on how much they earned.

This fully compensated 80 per cent of the 5.3 million households which had lost out; the remaining 20 per cent saw their loss at least halved. The Institute for Fiscal Studies calculated that 0.9 million households were still worse off than they had been before the 10p rate was scrapped.

In November 2008's pre-budget report, the government extended the compensation package, making the £600 personal allowance increase permanent, and extended it by another £130.

This meant, the Treasury said, that all but 0.6 million households would be fully compensated in 2009-10; by 2011-12, the number would drop to 0.5 million.

Frank Field has been quoting this 0.5 million number; he also says that around 1.3 million individuals are affected.

The Treasury report gives a breakdown of the 0.5 million households who still lose out. According to this, there are 0.1 million single pensioners, 0.1 million single non-pensioners, 0.1 couples with children, 0.1 couples without children, and 0.1 multiple tax units (such as a couple with grown-up children).

This clearly suggests there are more than 0.5 million individuals affected, but it's tricky to work out exactly how many, as tax credits are paid on a household basis, rather than by looking at individual income.

A couple may come out worse overall, for example, but one member could be slightly better off and the other slightly worse off. Similarly, a couple counted as gaining from the reforms might include one member who is left worse off.

Field also points out that only a small proportion of eligible tax credit recipients take them up, something he says is not factored into the Treasury's calculations.

The IFS said it has no reason to argue with the Treasury's calculation of 0.5 million households, but cautioned against trying to calculate a number of individuals. "Many people are better off with the basic reforms - but there are still losers," said Mike Brewer, director of the direct tax and welfare research programme.

The verdict

Half a million households will still be left worse off from the scrapping of the 10p tax rate, despite the compensatory measures the government has introduced.

It's less clear how many individuals will be adversely affected. It seems very likely that more than 0.5 million will be left out of pocket, although the way the tax credit system operates makes it harder to verify Frank Field's 1.3 million figure.

The vast majority of basic rate taxpayers have, in fact, been left better off by the compensation packages.

But short of reintroducing the 10p tax rate, it's hard to see how the government can compensate all of the 10p tax rate losers without leaving itself open to the accusation that it has increased the tax burden on the poorest.

FactCheck rating: 2

How ratings work

Every time a FactCheck article is published we'll give it a rating from zero to five.

The lower end of the scale indicates that the claim in question largerly checks out, while the upper end of the scale suggests misrepresentation, exaggeration, a massaging of statistics and/or language.

In the unlikely event that we award a 5 out of 5, our factcheckers have concluded that the claim under examination has absolutely no basis in fact.

The sources

Frank Field MP
Finance bill amendments
Treasury report
Institute for Fiscal Studies

Your views

You've read the article, now have your say. We want to know your experiences and your views. We also want to know if there are any claims you want given the FactCheck treatment.

Email factcheck@channel4.com

FactCheck will correct significant errors in a timely manner. Readers should direct their enquiries to the editor at the email address above.

Send this article by email

More on this story

Channel 4 is not responsible for the content of external websites.


Watch the Latest Channel 4 News

Watch Channel 4 News when you want

Latest UK news

More News blogs

View RSS feed

Sangin 'not a retreat'

image

Author Patrick Hennessey on the Helmand redeployment.

Who is horse-boy?

image

Hoof or spoof? Google Street View mystery figure speaks.

'Serious loss of discipline'

image

Saville inquiry condemns British soldiers for Bloody Sunday.

Afghan fatalities in full

British soldiers killed in Afghanistan

The full list of British soldiers killed in Afghanistan since 2001.

How to tweet

How and why to follow the Channel 4 News family on Twitter.

Most watched

image

Find out which reports and videos are getting people clicking online.




Channel 4 © 2010. Channel 4 is not responsible for the content of external websites.