FactCheck: the £40,000 question

Labour claims no one earning less than £40,000 will be left worse off by the pre-budget report, so why do the Tories disagree?

The background

Yesterday's pre-budget report announced big tax giveaways - the largest being a temporary VAT cut, costing £12.4bn - paid for, in part, by spending cuts and increased taxation in the future.

In April 2011, a new top tax rate is coming in - affecting only those earning more than £150,000 a year - and the rate of national insurance is due to increase across the board by 0.5 percentage points, although the threshold at which it is charged will also increase.

Already, a row is breaking out over just who will be worst hit by these tax increases.

The government says that, come 2011, no one earning less than £40,000 will be taxed more - a claim the chancellor made today on both Channel 4 News and Radio 4's Today programme.

The Conservatives, however, claim that anyone earning more than £19,000 will be worse off.

Who's right?

The analysis

For such a complicated pre-budget report, the answer is refreshingly simple. Or rather, comparatively simple, as it centres on one measure - the personal allowance at which income becomes taxable.

Let's check the small print of the pre-budget report. It makes a more nuanced claim than the chancellor does today.

"The combined effect of all [the government's] reforms will mean that taxpayers with incomes below £40,000 will pay less tax and national insurance contributions in April 2011 compared to April 2008."

The crucial phrase there is April 2008.

In May 2008, the government announced a £600 increase in the basic rate tax threshold - worth up to £120 a year to all basic rate taxpayers - to partly compensate for the scrapping of the 10p starter rate of tax.

So if we zip back to the start of the financial year in April - back when backbench dissent over the scrapping of the 10p starting rate of tax was a fever pitch - personal allowances were £600 lower than they are now and £600 lower than they will be in March 2009.

It's only if we compare this April 2008 figure to the tax and national insurance situation in April 2011 that no one earning under £40,000 will lose out. This is what is spelt out in the pre-budget report, but it's not quite what Alistair Darling said today.

If, however, we compare the situation now - with the additional £600 personal allowance taken as a given to include in the current calculations, rather than an additional windfall to come in the future - with the situation in April 2011, then the win-lose threshold is far lower.

The independent Institute for Fiscal Studies said today that those earning less than around £20,000 a year would end up paying more national insurance after 2011 than they do now, or have done over the 2008-9 financial year as a whole.

The 2011 real-terms increase to the national insurance threshold means those earning less than £20,000 will be paying less national insurance. But to include those earning up to £40,000 in the claim, we have to include the increased personal allowance.

Even if Alistair Darling had included the April qualification in his TV interview, how fair is it for the government to make the £40,000 claim - given that the £600 increased personal allowance is already very much in evidence in pay packets?

When it was announced, it was promised for - and budgeted for - this financial year only: there was no guarantee it would continue in its current form.

Darling said in May that the measure was being brought forward from the pre-budget report in order to give people the benefit sooner, and said he would "set out proposals for next year and beyond at that time".

It is true that, back in April, the government didn't expect to give this increased personal allowance - in that sense, it can be counted as a "tax cut" for this year, as we've discussed before.

But it's debatable how long this will hold water for, and as the government found over the scrapping of the 10p tax rate, a tax change that leaves people worse off in payslip terms is pretty hard to talk around.

FactCheck rating: 4

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The sources

Pre-budget report 2008 (.pdf)
Institute for Fiscal Studies: NI change for those of working age (.ppt)
Statement by the chancellor on income tax

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