April 2008 

I know that this is an issue which has raised some concerns recently. However, many people may not be aware of the full package of measures which will benefit millions, including the poorest people in our society.

It might be helpful if I first explain why we are doing this. We introduced the 10p rate in 1999 as a measure designed to help low income households. It applied to the first £1500 of taxable income. At that time, the rate amounted to a £195 cut in an individual’s annual tax bill.

But, of course, the cut applied to all tax payers. A millionaire gained from it to the same extent as someone on a low income. So, although the tax cut helped, it was not targeted to the most vulnerable. It did not give any more help to low income families than it gave to high income families.

Since 1999, we have developed our system of tax credits. These offer targeted help to people. There are specific tax credits to help those on retirement income, those in low-paid work, and those with children. Over 5 million working families now gain extra help from tax credits, and around 4 million pensioners gain from pension credit.

Tax credits do a great job in helping us tackle poverty. They have helped to halve child poverty and they have helped us lift 2 million pensioners out of poverty.  Families on low income are now gaining around £90 a week as a result of tax credits – a far bigger gain than could be achieved by the 10p tax rate. And the gain is targeted on those who most need the extra help.

Now that our tax credit system is fully in place, we can reform and simplify the income tax system. So we have taken out the 10p rate and at the same time reduced the basic rate of income tax to 20p (from 22p), giving us the lowest basic rate in over 70 years.

But we have done a lot of other things alongside this measure and it is important to take all the measures together when assessing their impact.

So, together with the changes to income tax, we have increased child benefit, increased child tax credit, substantially increased the pensioner personal tax allowance, raised the winter fuel payment and raised the minimum wage.

What do all these measures taken together mean for people in Warwick & Leamington?

• Households on average earnings, and which include children, all gain. On average they will see a tax cut of around £10 a week.

• At the moment, around 5,000 pensioners in Warwick & Leamington have an income high enough to be income tax payers. Our measures will mean that around 1,000 of these will no longer have to pay any tax at all.  The remaining 4,000 will enjoy a boost in post-tax income, again averaging around £10 a week.

• There around 7,000 families in Warwick & Leamington who are on below average income and who have children. All of them gain as a result of the budget measures.  Depending on family size and income levels, these families will gain by between £5 and £20 a week.

• There are around 2-3,000 people in Warwick & Leamington working full time on minimum wage.  They will all be around £13 a week better off.

So, as you can see from these examples, the extra help the budget gives is well targeted towards those on lower incomes. You don’t have to take my word for that.  The independent Institute for Fiscal Studies said, “Taking the budget as a whole, the poorest third of the population are the biggest winners, thanks to tax credits.”

But not all low earners are on tax credits. Some should be but are not claiming. We will encourage them to do so by making it easier. Others do not qualify. So some people, in particular those working part time but with no dependent children, and those between 60 and 65 years of age have not gained from the budget measures; they would in fact lose out, at around £3-4 a week on average.

This does not mean that the removal of the 10p rate was the wrong thing to do. But it does mean we need to take further steps in order to ensure that these groups do not lose out. We will therefore bring forward further measures to ensure that people in these groups are compensated, and we will ensure that the additional measures we introduce will be backdated to April 1st 2008.

The budget, and the further measures to be announced, will keep us on track with our overall objectives. The 2008 budget will lift a further 200,000 children out of poverty. We are therefore closer to halving the level we inherited in 1997. We can continue our progress towards full employment: We have halved unemployment since 1997 and all but eradicated long term youth unemployment. There are a further 3 million jobs in the economy and the number of people working is at its highest in our country’s history. We are lifting more pensioners out of poverty and helping all pensioners deal with record high fuel costs, thanks to increases in the tax-free winter payment, now £400 for our oldest pensioners.

Lower income households and families have been the big gainers from all of Labour’s budgets.  Under Labour, this will continue to be the case.

Everyone's individual circumstances are unique so I cannot give definite projections here. But as a general guideline, if you are 65 or over you will be benefitting from a huge increase in your personal tax allowance. If you are over 60, you may benefit from big increases in Pension Credit. If you have children, Child Tax Credit has gone up substantially and we have done more to help university student financing. If you are working on the National Minimum Wage, we have increased your wage to more than offset the increase in income tax. If you are childless or unmarried, we have increased your personal allowances, Working Tax Credit and Council Tax Benefit.

Tax Credits are NOT a benefit or a handout. It is money that is due back to you because of the contributions you have made throughout your life.

First of all, we have increased everyone’s personal tax allowance so that more of their earnings are completely protected from paying tax. For most people the personal allowance has gone up by £210 to £5,435. If you are aged between 65 and 74, the amount has increased by £1480 to £9,030. If you are 75 or over, the amount you can earn tax-free is now £9,180. 

The 10p tax rate still applies to your savings income. All interest and dividends you earn are eligible for the 10% rate. We have also increased the amount you can save in an ISA, the savings account which is completely protected from any tax, to £3600 cash per year. This is because we believe that hard earned savings should not be taxed again.

But what if you are on a low income, but younger than 65? You can apply for our Pension Credit if you are aged 60 or over. Pension Credit guarantees you a minimum weekly income. If you are single, you will get your weekly income topped up to £124.05; if you live with a partner, your joint total income will be topped up to £189.35 per week. If you are 65 or over, you can get an additional £19.71 per week, or £26.13 if you live with a partner. And if you didn’t know about Pension Credit before now, you can get backdated entitlements up to the last twelve months.

If you are still working there are other measures you can take advantage of. In October last year, we increased the minimum wage to £5.52 per hour, and from October 2008 it will increase again to £5.73 – giving an extra £45.60 per month on a 30 hour week. We also increased the Working Tax Credit, which we introduced in 1998. This is a payment to top-up the earnings of those on low-incomes. It is not a benefit: it is something that you are entitled to. The maximum basic element increases this year by £70 to £1800. Couples and lone parents can claim an additional £1770. Disabled workers can claim another £2405 and another £1020 for those with severe disabilities.

It is important to check whether you are missing out on Working Tax Credits. Figures show that lots of people who are eligible are not getting their money!

Do you have children still living with you? We have increased the Child Tax Credit by £240 to £2085. The amount of Child Benefit (which is different to Child Tax Credit) is also increased to £18.80 per week for the first child, and £12.55 for each other child. If you are paying for childcare you can claim up to 80% of the costs back from the government.

If your children are going off to university, then you will no longer be eligible for Child Tax Credit or Child Benefit - but we have increased our support for students (and parents!). We have raised the minimum income threshold for a maintenance grant from £17,500 to £25,000. The maximum for a partial grant is now £60,000 - this means that nearly two thirds of all students will now receive a grant. Students can now pay their fees back when they begin earning after university, instead of up-front at the beginning of term. And students can also still apply for low-interest student loans.

There are other measures too, which may mean that you are in fact not losing out as a result of the 10% rate being scrapped. Council Tax Benefit has increased (if you’re getting Pension Credit you are automatically eligible for Council Tax Benefit); we’ve increased the Winter Fuel Payment for everyone over 60, including an extra one-off payment this year. We have given everyone over 65 the right to travel for free on buses throughout England.  

Our priorities are helping families, children and pensioners. The changes in the Budget this year will help the most vulnerable in our society. The independent Institute of Financial Studies described it as a "pro-poor Budget".

These changes reflect those priorities and build upon our historic record. We have done more than any other previous government to reduce poverty in the UK and help those on low incomes. Since 1997 we have lifted 2.4 million children and two million pensioners out of poverty. These are historic achievements.