Rise in personal tax allowance announced

The Chancellor, Alistair Darling has announced some of the details of the compensation the government is to offer taxpayers who have been hit by the scrapping of the 10p income tax starting rate.

Mr Darling told the House of Commons that the basic rate personal tax allowance is to rise by £600 to £6,035.

As a result basic rate taxpayers will save £120 annually.

The Chancellor also said that the allowance for higher rate taxpayers would be reduced.

To cut 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. The higher rate band will now start at £40,835. Higher rate taxpayers will see no difference in the amount of tax they pay.

The cost of raising the basic rate allowance to £6,035 will lose the government some £2.7 billion in income.

The increase in the allowance is to be backdated to 6 April.

Basic rate taxpayers will receive a £60 lump sum in September to be followed by £10 a month for the rest of the year.

Mr Darling said: “At a cost of £2.7 billion, I will increase the individual personal tax allowances by £600 to £6,035 for this financial year, benefiting all basic rate taxpayers under the age of 65.”

The move, the government estimates, will compensate 4.2 million households with as much as or more than they forfeited when the 10p rate was abolished.

The Chancellor continued: “The remaining 1.1 million households will see their loss at least halved. In other words, 80 per cent of households are fully compensated, with the remaining 20 per cent compensated by at least half. And in addition, 600,000 people on low incomes will be taken out of income tax altogether.”

The changes are to be included in the current Finance Bill.