Book Description

This report examines the impact of the abolition of the 10 pence rate of income tax, considering separately the effects of initial implementation and the effects in the light of the changes to personal allowances announced on 13 May 2008. The losers from the measures as initially implemented were people whose taxable income was small and for whom the loss might be significant when required to manage a personal or household budget at a time of sharply rising prices for many essential goods and services. For the current tax year, in the circumstances which the Chancellor of the Exchequer faced, the option chosen on 13 May of increasing personal allowances, but confining the benefits to basic rate taxpayers, was probably the least bad option, with the benefits of simplicity, transparency and greater incentives to work on the basis that fewer taxpayers face high marginal deduction rates. However, £2 billion of the £2.7 billion committed to that measure is not devoted to compensating losers from the removal of the starting rate of income tax, and is not well-targeted. The Government must learn lessons relating to budgetary processes. The Government should publish a Household Impact Assessment alongside future Budgets and Pre-Budget Reports. There is a pressing need for the Government to compensate the remaining 1.1 million households who lose from the removal of the starting rate of income tax even after the 13 May changes. In the longer-term, reforms should be centred on the greater challenges faced by the Government in combating poverty. The Committee recommends the establishment of a Poverty Commission on a similar basis to the Pensions Commission to examine the public policy challenges relating to poverty.