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Basic rate tax cut - master move?
In his last budget speech, Gordon Brown abolished the starting rate tax band to pay for a 2% cut in the income tax basic rate. The move was hailed as a masterstroke by many commentators, but viewed by others as crude political cynicism.
Mike Warburton, senior tax partner at Grant Thornton, argues that those needing the most help will lose out, while Stephen Herring, a tax partner at BDO Stoy Hayward, insists the move makes sense.
Mike Warburton, Grant Thornton, argues
If the 10% band was a good idea in 1999, what's changed? It's because he needs the money to fund the basic tax giveaway so it's headline grabbing at the expense of poor people. My main objection is the impact on those less well-off. Income tax will double for a lot of low earners but the government doesn't recognise exactly how much difference that will make for people. What should they stop spending on to make up for it? Food? Heating? It is a major blow for many pensioners living on low incomes, for whom the £4.30 a week they will lose may represent the cost of a bus fare to visit family and friends, maybe the highlight of their week. The tax credits that many people will be eligible for cannot justify it - about 40% of those eligible for credits don't claim them because they are incredibly complicated. Whether you are affected by this will also depend on your overall sources of income. It will be a mystery to many people.
The impact is on people with low incomes who will suffer real hardship as a result, and all for Gordon Brown to achieve the headlines he wanted. It's a con.
Stephen Herring, BDO Stoy Hayward, says
Firstly, it was an excellent decision that will simplify the tax system. No one was calling for a small starting band below the basic rate when he introduced it and it made the system more complicated.
For example, the 10% starting rate includes savings income. So if you have interest from a savings account that falls within the starting rate band, you would currently be taxed at source at the rate of 20%. The elimination of the starting rate band will remove this anomaly. So having a flatter system with less rate bands and exemptions is in principle a good thing as long as no more income tax is collected in total.
Secondly, even well-informed people often struggle with the tax system, especially when filing their annual tax return, because it's so complex. The personal tax system should be transparent and easy to understand. This is a significant step in the right direction.
It is true that some people on lower incomes will lose out if they have insufficient compensation from the cut in the basic rate to 20%. But this should have been addressed by increasing the personal allowance to compensate those at the bottom end of the spectrum to ensure they were not negatively affected.
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