On 13 May the Chancellor of the Exchequer announced a surprise amendment to be made to the Finance Bill 2008 – the personal tax free allowance will rise for the 2008/09 tax year to £6,035 from £ 5,435.

The rise is £600 over and above the increase in the allowance announced by Mr Darling in his Budget speech to the House of Commons.  The change will be accompanied by a corresponding rise in the higher rate threshold (the point at which UK tax payers start paying income tax at 40% on their income) in order to prevent them benefitting.

The rationale is to try and offset the damaging political fallout from the abolition of the 10% starting rate of income tax, also due to take effect from 6 April 2008.  This was announced to parliament with much delight on the government benches at the same time as a reduction on the basic rate of income tax to 20% (from 22%) as part of the then Chancellor Gordon Brown’s final Budget in 2007.

However, as the impact of the changes on specific groups of low and middle income earners became apparent, including the childless and others between 60 and 64, a threatened rebellion by Labour members of parliament risked a defeat for the government on the passage of the Finance Bill.  Avoiding a disintegration of Labour Party parliamentary discipline appears to some to have provided adequate motivation for a swift correction of fiscal policy.

Further steps to offset the impact of the abolition of the 10% rate are due to be announced in the Chancellor’s autumn pre-Budget review.

Full text of Chancellor’s speech can be found at http://www.hmrc.gov.uk/news/may13.htm

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