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The Chancellor, Alastair Darling has announced a £600 increase in the personal tax allowance for 2008-09 as a “compensation package” for lower earners affected by the abolition of the 10% band for earned and pension income.

In announcing this measure, the Chancellor told the House of Commons that, “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 therefore reducing the threshold at which an individual starts to pay tax at the higher rate by £600.” This would allow higher rate taxpayers to also share in the windfall and this of course, is not the intention of the Government.

HMRC subsequently corrected this mistake on their website by stating that to reduce the higher rate threshold as announced by the Chancellor, the basic rate limit will be reduced by £1,200 from £36,000 to £34,800. Higher rate taxpayers will see no difference in the amount of tax they pay.

HMRC have confirmed that employers should not make any adjustments to PAYE code numbers at the moment but should continue to use the allowances and guidance published in May 2008. The emergency code for new employees joining without a code number remains 543L. HMRC will be issuing details in the next few weeks of how and when this change should be made and what it will mean for payrolls.

Commenting on this announcement, the Chartered Institute of Taxation (CIOT) Low Incomes Tax Reform Group (LITRG) said "We welcome the Chancellor’s announcement that he will aim to compensate some 10% losers by raising the basic personal allowance for the under-65s. Nevertheless, we have significant reservations.

Although it is churlish to be unhappy about a strategy (raising personal allowances) that we would normally welcome, we cannot let pass the fact that it is some of the very poorest who still lose out."