With permission, Mr. Speaker, I would like to make a statement on how I propose to deal, this year, with the consequences of the withdrawal of the 10p starting rate of income tax.
In the Budget last year, my right hon. Friend the Prime Minister, as Chancellor, introduced just two rates of tax with the basic rate of tax cut from 22p to 20p—the lowest rate for 75 years. At that time, allowances for pensioners over the age of 65 were increased; and recognising that, as the tax credit system became more developed and more generous, we were better able to target resources on low-income households, we increased the working tax credit and the child tax credit, as well as child benefit.
As a result of those changes, more than 16 million households have gained and 600,000 more pensioners pay no income tax at all. Because of the changes announced in 2007 and in this year's Budget, half a million children will be lifted out of poverty—a record that no other Government have ever matched.
In my letter to the Chairman of the Treasury Committee three weeks ago, I said that I would set out our proposals to help those who lost out as a result of the withdrawal of the 10p starting rate of tax for the longer term in the pre-Budget report later this year. As I said in my letter, my focus would be on changes to offset the average loss of £120 per household and that whatever conclusions we came to, the changes would be backdated to the start of this financial year. But I also said that I would not wait unnecessarily until November before setting out how we intended to proceed.
I said that I would look at the administrative practicalities of other options that some right hon. and hon. Members have suggested, including a one-off rebate or compensatory payment, as well as changes to the tax credit system to allow the average losses to be offset. Having looked at this further, I believe that a rebate scheme would be complex and expensive to administer. It would also take time to set up and, in any event, changes to the eligibility for tax credits could not be introduced this year.
However, I can bring forward a proposal for this year that will offset the average loss and that will provide financial support more fairly, quickly and efficiently than any one-off rebate scheme—provided we legislate for it now in this year's Finance Bill. For that reason, I am proposing to bring forward one measure from the pre-Budget report now.
I want to help families on low and middle incomes as soon as possible. But my proposal for this year will not only help those on low incomes who lost out, but do more to help all basic rate taxpaying families at a time when oil and food prices have been rising in every part of the world. So, at a cost of £2.7 billion, I will increase the individual personal tax allowance by £600 to £6,035 for this financial year, benefiting all basic rate taxpayers under 65.
That will mean that 22 million people on low and middle incomes will gain an additional £120 this year. It will mean that 4.2 million households will receive as much, or more than, they originally lost. The remaining 1.1 million households will see their loss at least halved. In other words, 80 per cent. of households are fully compensated, with the remaining 20 per cent. compensated by at least half. In addition, 600,000 people on low incomes will be taken out of income tax altogether.
People aged between 60 and 64, whose average loss was £100, will also get the advantage of the increased personal allowance worth up to £120. They will also receive the additional £50 winter fuel payment for this year, which I announced in the Budget. The increased personal allowance will apply to all income for this tax year and so will be backdated to
Higher rate taxpayers were largely unaffected by the reforms that were announced last year. So it is fair to focus this additional support on basic rate taxpayers only. However, as the £600 increased personal allowance applies not just to basic rate taxpayers but also to those paying tax at a higher rate, I am reducing the threshold at which an individual starts to pay tax at the higher rate by £600.
The net effect of these changes is that the tax liability of everyone who currently pays tax at 40 per cent. will be unaffected by the increase in the personal allowance. Those brought into the higher rate will gain by up to £120 this year.
I propose to legislate for these changes in this year's Finance Bill so that taxpayers will get the benefit of the change from September. Raising the personal allowance is simpler than other solutions, and also retains the benefit of a simpler tax system and allows basic rate taxpayers to see the benefits as soon as possible, and for the whole of this financial year.
My proposal will also provide additional support for individuals and families this year, including those on middle incomes who have benefited from other reforms announced in 2007. We are providing that support at a time when they are facing additional costs. I have brought forward this measure from the pre-Budget report in order to ensure that people get the benefit as soon as possible. I shall set out proposals for next year and beyond at that time.
As I made clear at the time of the Budget, it is right and sensible to allow borrowing to rise and investment to be maintained as the economy slows. Debt is lower than it was in the past and low by international standards. Our fiscal policy, like our monetary policy, is designed to support stability in these uncertain economic times generated by the turbulence in world financial markets and global commodity-price inflation. I am able to finance the proposal through borrowing this year, ensuring that we do not take money out of the economy at this time.
I will, of course, set out my fiscal projections and decisions in the pre-Budget report as usual, consistent with the fiscal rules and in line with the requirements of the code for financial stability. For future years, our aim is to continue the same level of support for those on lower incomes and I shall bring forward proposals to do that in the pre-Budget report.
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 when they face increased bills, so supporting the economy. I commend the statement to the House.
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