Gordon Prentice - Pendle's Campaigning Labour MP
| Pendle MP Wants Re-think on 10p Tax Rate |
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Tags: budget | Press Release | tax | tax credits
| Written by Gordon Prentice |
| Tuesday, 08 April 2008 00:00 |
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Pendle MP, Gordon Prentice, is calling on the Prime Minister to re-think the abolition of the 10p tax rate which leaves some low income groups worse off than before. The decision to abolish the 10p rate was taken in last year's Budget but is only now coming into effect. At the same time, the basic rate of income tax goes down from 22p to 20p. Yesterday, a report on the Budget from the Commons Treasury Select Committee (see below) says "those most affected by the abolition of the 10p rate of income tax appear to be those below the age of 65 with an income under 18,500 pounds who are in childless households". The MP commented: "Clearly, we need to do something about this, and soon. We cannot have people who are already struggling to make ends meet face further difficulties in balancing their own household budgets." The MP signed the Commons motion on the issue last week which was tabled by Hyndburn MP, Greg Pope. Note to Editors: The relevant section of the Treasury Slect Committee report reads: TAX CREDIT TAKE-UP RATES 61. High marginal deduction rates are faced by those who are already part of the tax credit and benefit system, but not all those eligible take up the tax credits owed to them. The importance of the need for higher levels of tax credit take up were highlighted when we discussed the reforms announced in the 2007 Budget, which included the abolition of the 10 pence starting rate of income tax, and a reduction in the basic rate of income tax from 22 pence to 20 pence from April 2008.[221] As a result of these reforms, some low-income workers may have been potentially disadvantaged because the loss of the 10% starting rate of income tax was not outweighed by the gain from an overall lower basic rate of income tax. The Treasury provided the following evidence as to who might lose as a result of the changes in Budget 2007, and how those losses may be mitigated: Estimates are that 0.8m single earners with income under £18,500 will see their income decrease by around £1.45 a week on average. The reforms overall, however, are of particular benefit to low income households. The reforms will lift around 200,000 children out of poverty, and analysis of the reforms by the Institute for Fiscal Studies showed the greatest gains are for households in the poorest two deciles. The maximum amount any single individual could be worse off by is £232 per year (£4.46 per week) about 3% of net income. This loss would be completely offset by increases in Working Tax Credits for those eligible to claim. For those not eligible for [Working Tax Credits] it is possible that households around or under the level of income achieving the maximum loss could be receiving Housing and/or Council Tax Benefits and could therefore have up to 85% of this loss offset by increases in HB/CTB. For households that are worse off, the average loss is about £2 per week.[222] The Chancellor of the Exchequer acknowledged that there were some sections of society that would be affected by the loss of the 10 pence starting rate of income tax: There is a particular group of people, mainly women between the age of 60 and 65, who would have been paying the 10p rate who, if you look at where their incomes have come from in the last ten years, [are] better off than they were. Yes, it would affect them.[223] The Chancellor of the Exchequer was also keen to point out that "We have tried to help wherever we can through the tax credit. I have mentioned the winter fuel payment and for a lot of people their incomes will have gone up." He also to stated that overall "the reduction to 20 pence will benefit very substantial numbers of people".[224] Those most affected by the abolition of the 10 pence rate of income tax appear to be those below the age of 65 with an income under £18,500 who are in childless households. The effect is greatest on those households where no individual is above the age of 60 because the household does not then benefit from the higher winter fuel allowance. We accept that there are benefits in tax simplification and that there are merits to focus on both the needs of children and motivation to work. However, the group of main losers from the abolition of the 10 pence rate of income tax seem an unreasonable target for raising additional tax revenues to fund these and other initiatives. 62. Despite tax credits being identified as one of the ways of mitigating the loss of the 10 pence starting rate of income tax, as Treasury officials acknowledged, there has been a continuing problem of low take-up rates of working tax credits.[225] As we noted last year, the problem of low take-up rates is especially acute among families without children, where the central estimate of the take-up rate of working tax credits was 22% for the financial year 2005-06.[226] Treasury officials pointed out that take-up of the working tax credit, which I agree has not been as good as we would have liked, is increasing. That is also an important reality to bear in mind, and steps are being taken to draw the attention of people who can claim that tax credit to the fact that it is available, and that is having some success. More people are claiming the working tax credit.[227] The Chancellor of the Exchequer also acknowledged that "There are particular groups who would be eligible for the working tax credit who are not taking it up and that is something that we need to do something about".[228] He reiterated his desire to see further action, telling us that "where take-up is insufficient, particularly with people without children, I would like to see us do more".[229] We are concerned by the poor take-up rate of working tax credit among eligible families without children, especially given that working tax credits are intended to mitigate for low-income households the effect of the removal of the 10 pence starting rate of income tax. We expect the Treasury and HM Revenue & Customs to galvanise their efforts in this area in coming months and years. We recommend that the Government report regularly in Budgets and Pre-Budget Reports, starting with the 2008 Pre-Budget Report, on progress in increasing the take-up rates of working tax credits for those sections of society with particularly low take-up rates. We further recommend that the Treasury commission research into whether the withdrawal of the 10 pence income tax band and high marginal deduction rates are creating disincentives that could frustrate the Government's welfare to work objectives. |
| Last Updated ( Wednesday, 08 October 2008 11:24 ) |