March Budget, May Mini-Budget

Tear up your 2008/09 tax tables! Alistair Darling’s emergency mini-Budget on 13 May successfully defused a Labour backbench revolt over abolition of the 10% starting rate of income tax. But his solution of juggling allowances and tax bands was not as straightforward as it at first appears:

  • The basic personal allowance has been increased by £600 to £6,035. Other allowances have been left unchanged, although it is worth noting that age allowances were raised by over 19% in the March Budget to compensate for the loss of the 10% tax band.
  • The Chancellor also lowered the starting point of higher rate tax, with the aim of limiting the cost of the change to personal allowances. The way he did this was far from clear in his parliamentary statement, but the truth later emerged in an announcement from Her Majesty’s Revenue & Customs (HMRC). The band of income subject to basic rate tax has been cut by £1,200 from £36,000 to £34,800.

Once the £600 increase in the personal allowance is taken into account, this means that you will pay higher rate tax if your total income is more than £40,835, compared with the £41,435 figure stemming from the March Budget.

Are you better off? This depends on the level and type of your income and your age, but the typical outcomes if you are under 65 are:

Total Income Position
Up to £5,435 No change
£5,435 - £6,035 £0 - £120 better off
£6,035 - £40,835 £120 better off
£40,835 - £41,435 £120 - £0 better off
£41,435 and above No change

If you are employed, any benefits of the changes will probably emerge firstly as a tax rebate in your September pay. Thereafter at best you will be £10 a month better off.

The Chancellor’s restructuring has a number of other consequences:

  • There will still be about 1.1m losers from the abolition of the 10% band. The widely quoted £120 gain matched the average loss for those affected.
  • The link between the starting point for national insurance contributions (NICs) and the personal allowance has been lost. You now begin paying NICs at a level £600 below the starting point for income tax.
  • The shrinking of the basic rate band will create about 150,000 more higher rate taxpayers, bring their total number to almost four million.
  • A planned increase to the upper limit for NICs announced by Gordon Brown in 2007 and due to take effect next April has been thrown into disarray.
  • The government will have to borrow another £2.7 billion (on top of a projected £43bn) to fund the tax changes. This brings it perilously close to breaching one of Gordon Brown’s ‘golden rules’ on government debt.

Mr Darling and the Treasury now have the task of finding a long term solution to the 10% band problem. We should learn the outcome of this search in the Pre-Budget Report, due in November.