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Robin Williamson of the Low Incomes Tax Reform Group points out that some people are still adversely affected following the withdrawal of the general 10% starting rate of income tax.

Introduction

During the closing stages of the Finance Bill, Parliament is once again debating the implications of withdrawing the general 10% starting rate of income tax, focusing on those who are still losing out.

With the increase in the basic personal allowance this year to £6,475, most of those who lost out last year will be fully compensated by April 2010. But there remain some on incomes between about £7,300 and £8,300 a year who will still not have recouped all the extra tax they paid in 2008-09.

Some Progress...

Most people were compensated for the loss of the 10% rate band by the mid-year increase in the 2008-09 basic personal allowance to £6,035. Other compensating measures included:

• the reduction in basic rate tax (which meant anyone who had income of over about £16,500 came out ahead);
• the useful increase in allowances for those aged 65 and over;
• increases in child and working tax credits (though some will argue that doesn’t compensate for an income tax loss as they would have received that anyway);
• the continuation of the 10% rate for savings (see below).

But Some Still Lose Out 

But not everyone is fully compensated. For example, a person with an annual income of £7,500 will pay less tax this year than they did in 2007-08 before the 10% rate was withdrawn. However, they still lose about £32 overall, because they are not fully compensated for the extra tax they had to pay in 2008-09.

The groups who may not be fully compensated are broadly:

1. those who have retired early but are not entitled to receive the higher age-related tax allowances because they have not yet reached the age of 65;
2. people with no children who are not entitled to working tax credit; and
3.  those who are entitled to working tax credit but have not claimed it. 

In relation to the second category it is important to remember that not everyone who works is entitled to working tax credit. If you are:

• working for less than 16 hours a week; or
• a young person under 25 without children; or
• someone of 25 or over who has no children and works less than 30 hours a week;

you will generally not be entitled to working tax credit. We say ‘generally' because you can still get working tax credit if you qualify for the disability element of working tax credit. This means you are aged 16 or over, work at least 16 hours each week, have a disability which puts you at a disadvantage in getting a job and meet the qualifying benefit conditions.

If you are aged 50 or over and are returning to the job market after a period on certain benefits you may also qualify for working tax credit by working 16 hours or more each week.

Regarding the third category, there is still a serious problem of non take-up of working tax credit among people without children. At present it is estimated that only about one quarter of those entitled actually claim the benefit.

One or two caveats. We have not taken national insurance contributions into account in our workings, because that depends very much on the pattern of earnings. Nor have we adjusted the figures for inflation, so the ‘real' loss could in fact be greater and apply to a wider range of incomes.

But let’s not forget...

...the 10% savings rate that was introduced from 6 April 2008.  If they can work out its complexities ( see The Strange Workings of the New 10% Rate ), people on low incomes could still benefit from a 10% tax rate if part of their income is from savings.  But the calculations are complex and many will not understand they are entitled to it, as the relief cannot be given automatically and a claim has to be submitted. 

The publicity surrounding the withdrawal of the 10% general tax rate has overshadowed the introduction of this relief, and HMRC have done little to encourage take-up. For those reasons, most remain unaware of its existence. 

Older people on low incomes who think they might be able to claim the 10% savings rate can contact Tax Help for Older People for help.