Abolition of 10p tax 'will disadvantage low earners'

Monday, 7 April 2008 12:00 AM

Gordon Brown continues to face backbench pressure over the abolition of the 10p tax rate.

An influential group of MPs has said the move will penalise low-earning households and said the prime minister was "unreasonable" in targeting poorer households for revenue-raising measures.

The abolition of the 10p tax rate was announced in Mr Brown's final Budget last year as part of the simplification of the tax system.

The impact of the cut on poorer households was initially overlooked amid the headline grabbing cut in the basic rate of income tax, from 22 per cent to 20 per cent.

But the Labour-dominated Treasury select committee has now confirmed independent estimates that scrapping the 10p tax rate will leave anyone earning less than £18,500 a year worse off.

Ministers have defended the move, arguing people are still better off overall because of Labour's package of reforms since 1997.

But a Treasury select committee report said the move would penalise childless low-earners.

The report said the five million low-earning people affected had been an "unreasonable target for raising additional tax revenues".

"While tax simplification is a laudable aim, it seems strange that the abolition of the 10p starting rate of income tax disadvantages mainly low income households," said committee chairman John McFall said.

"As such, the government must ensure that these people are identified, and appropriate help given to them to ensure they receive the benefits to which they are entitled."

But business secretary John Hutton said those ill-affected would be only slightly worse off, while families with children would be "significantly better off".

Speaking to the BBC's Andrew Marr Show, he said: "We are talking in the worst case scenario about half a per cent of net income being the scale of the maximum loss that someone might have."

Mr Brown was forced to address the parliamentary Labour party last week amid growing opposition to the tax reform.

More than 30 Labour MPs signed up to an early day motion condemning the move before it was withdrawn under government pressure.

Shadow chancellor George Osborne said there was a growing revolt within Labour over tax and the committee's report was the latest "stinging attack" on Mr Brown.

"The committee understands better than the prime minister that abolishing the 10p band will punish low income families and add to their already rising cost living," Mr Osborne said.

Liberal Democrat leader Nick Clegg said Labour was now at a "defining moment" where it was abandoning fairness and hitting five million poor people.

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