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John Andrews of the Low Incomes Tax Reform Group ( http://www.litrg.org.uk )explains that the Chancellor's proposed increase in personal allowances will not compensate every taxpayer affected by the abolition of the 10% income tax rate.

The 10% Furore

Not everyone wins overall in the 10% furore, even after the £2.7 billion “compensation” package announced by the Chancellor.

One particular group, those between 60 and 64, are still likely to lose either because their income is too low, or because the Department for Work and Pensions and HMRC do not co-operate with each other.

So we have decided to consider this group who have been vociferous to the helpline of TaxHelp for Older People since the impact was felt in April.

Comparing like with like

The first difficulty with looking for 'losers' is what do we compare, when looking for that loss? Do we compare net incomes in 2007/08 with net incomes in 2008/09? Or do we just look to 2008/09 and imagine that the 10% band regime was still in place and compare it with the “lower basic rate regime and no 10%” that was introduced?

We have taken the latter route as it reflects the specific change which was heralded, albeit we consider the existence of the Working Tax Credit as that was announced as a compensating factor in the original proposition.

That original proposition produced losers. This was acknowledged by the Chancellor (and we had analysed who those were) and he said that he particularly recognised the problem for those pensioners aged 60 to 64.

Examples

Our examples are of single women or widows aged 60 to 64 with little savings and who are not working. Before the £600 addition to their personal allowance announced on Tuesday, these pensioners were losers of between £0 and £223 depending upon their income levels.

The £600 additional allowance gives extra relief of up to £120. Therefore the loss is now between £0 and £103 for 2008/09.

Because we are dealing with people on very small incomes, we have to take into account the existence of Pension Credit as these pensioners are regarded by the government as being “in poverty”. As Pension Credit is looked at on a weekly basis, so we consider the situations in that way also.

We also look at the position as if the 10% band was in place (situation A); the 20% band has come in (situation B); and the £600 additional relief has been added (situation C).

Ella

Ella has pensions which give her £116 a week (£6,035 a year).

Situation A (10% band)

Ella pays tax of £1.15 per week to HMRC and gets this refunded by the DWP through an increase in her Pension Credit.

Situation B (no 10% band, 20% tax)

Ella pays tax of £2.30 per week to HMRC and gets this refunded by the DWP through an increase in her Pension Credit.

Situation C (with £600 extra personal allowance)

Ella will pay tax of £2.30 a week and get a DWP refund of £2.30 in her Pension Credit until the last week of September, when she will receive £55.30 net tax refund. She will move on to Pension Credit of £8.05 a week from October and not pay tax for the rest of the year.

Lucy

Lucy has pensions which give her £128 a week (£6,656 a year).

Situation A (10% band)

Lucy pays tax of £2.35 per week which gives her a net income of £125.65 per week. She gets no Pension Credit.

Situation B (no 10% band, 20% tax)

Lucy pays tax of £4.70 per week which gives her a net income of £123.30 per week but the DWP will pay £0.75 per week of that additional tax liability plus give her an entitlement to maximum housing benefit/council tax benefit and other passported benefits.

Situation C (with £600 extra personal allowance)

Lucy will pay tax of £4.70 a week and get a DWP refund of £0.75 until the last week of September when she will receive £55.30 net tax refund. She will lose her Pension Credit and her entitlement to maximum housing benefit/council tax benefit and other passported benefits. She will pay tax from October of £2.35 per week which gives her a net income of £125.65 for the rest of the year.

Elizabeth

Elizabeth has pensions which give her £147.40 a week (£7,665 a year).

Situation A (10% band)

Elizabeth pays tax of £4.28 per week which gives her a net income of £143.12 per week.

Situation B (no 10% band, 20% tax)

Elizabeth pays tax of £8.56 per week which gives her a net income of £138.84 per week.

Situation C (with £600 extra personal allowance)

Elizabeth will have the same cash flow issues as Lucy but without the Pension Credit complexity. Over the year she will pay tax of £6.27 per week giving her a net income of £141.13 per week.

Result

Elizabeth is clearly worse off, even if you take into account the one-off £50 addition to Winter Fuel Allowance announced in the Budget.

What will be less obvious is that Ella and Lucy may well lose in other ways, not due to the base figures shown above; but due to the fact that the DWP will be most unlikely to give either Ella or Lucy the Pension Credit to which they are entitled.

This deficiency arises because the DWP do not tell its customers what to do about changes in their tax position and the systems rely upon close co-operation between HMRC and the DWP and this does not happen.

Who will advise Ella and Lucy what to do now? What great publicity drive will now be instituted to reach them?

Tax and benefits interaction

The policy should change so that the government doesn’t take with its left hand whilst expecting its right hand to give it back. Too often the right hand remains firmly in its pocket.

We wish it were otherwise and we have strongly made the case for the DWP and HMRC to work together to deliver the correct entitlements to their joint customers. Our pleas have been ignored for the last two years. Meanwhile, those most in need continue to lose out.