Personal tax allowance concessions could yet leave millions worse off

The Chancellor has been warned that some 18 million households could be worse off next year if he does not maintain changes to the personal tax allowance.

The Institute for Fiscal Studies (IFS), an independent think tank, has argued that 18 million families could lose as much as £150 a year should Alistair Darling decide not to keep the temporary tax concessions made to compensate taxpayers for the abolition of the starting 10p rate.

In his mini-Budget of 13 May, the Chancellor raised the personal tax allowance to offset the loss of the 10p rate.

That, combined with higher winter fuel payments, will see 21.3 million families better off this year.

But were the tax concessions to be reversed in the next Budget, the IFS said that 18 million families would lose out, while only 3.6 million households would benefit.

The Chancellor’s problem is the cost of keeping the changes in place at a time when government borrowing is rising and public finances are under strain.

It is estimated that it will cost an additional £2.7 billion a year to maintain the tax concessions and a further £575 million to cover the fuel payments. With extra borrowing at this level, the IFS argued that the government would run the risk of breaching its rule of holding national debt below 40 per cent of GDP.

Robert Chote, the IFS’s director, said: “By announcing a big one-off increase in the personal tax allowance, Alistair Darling has not only created millions of winners this year: he has created millions of potential losers next year.

“On the evidence of its recent decisions, the government may well be afraid to take their gains away. If public sector borrowing ends up permanently higher as a result, it will further undermine the credibility of the government’s management of the public finances and increase the probability of future tax increases or spending cuts, perhaps soon after the next general election.”

If the tax concessions do not survive the next Budget, the Chancellor could look at tax credits as a way of helping lower paid earners.

A Treasury spokesman said: “As the Chancellor said in his statement to the House of Commons, for future years our aim is to continue the same level of support for those on lower incomes. We will set out our plans for future years in the Pre-Budget Report along with our fiscal projections, in line with the requirements of the Code for Fiscal Stability.”