Income tax reforms 'will hit low earners'

Advisers have denounced Gordon Brown’s overhaul of the personal tax regime as
‘negligible’ and ‘tinkering’.

Experts have even suggested that the changes could make low earners – those
on less than £17,000 – worse off.

Brown made instant headlines by cutting the basic rate of income tax to 20%,
giving back £17.5bn over the next two years. But removing the starting rate of
income tax on non-savings income saw Brown rake in £16bn over 2008/09 and
2009/10.

The realignment of income tax with national insurance contributions also
means Brown will boost Treasury coffers by £1.1bn next year and £1.4bn the year
after.

He achieves the move by introducing a phased alignment of income tax and
national insurance higher thresholds.

Under current rules some mid-rate taxpayers pay lower rate national
insurance, the alignment means they will pay more. The threshold for higher rate
income tax will climb to £43,000 from 2008/09.

Experts noted, however, that the changes could earn much more for the
Treasury on an annual basis depending on the period for phasing in and on how
many people fall into the threshold bands.

Advisers poured scorn on the changes, suggesting there was little of benefit
for the average individual, with some lower earners set to lose out from the
changes.

Deloitte private client partner Patricia Mock said that the changes could
even have a negative effect for those earning under £17,000.

‘That figure looks to me to be a break even, under that you might be worse
off but then its not as easy to calculate because of benefits available to those
claiming working tax credits,’ said Mock.

Grant Thornton tax partner Mike Warburton described the changes to personal
taxation as a ‘con’.

‘Brown’s collecting more by abolishing the 10% band than anything else, it’s
anything but a giveaway,’ said Warburton.

Warburton also claimed the Budget had made it less attractive for individuals
to operate as small companies, with the rise in the SME tax rate.

Ernst & Young partner Patrick Stevens said theincome tax moves were
sensible, but felt higher earners could be slightly worse off unless they had a
child, in which case child benefits would negate the effect.