The effect of the abolition of the 10p tax rate on part time workers

The abolition of the 10% and 22% tax bands came into effect in the 2008-2009 tax year.  The two bands were replaced with one of 20% to simplify the PAYE system and make it easier for employers especially small employers to operate.  Anyone with an income under £18,000 would pay more tax when the two bands disappeared.  To compensate for this the removal of the rate band was accompanied by adjustments in the tax credit system and more recently by the increase in the personal allowance and winter fuel payments.

Increases in tax credits

To understand the amendments it is important to understand the tax credit system.  

Tax credits can be claimed by a number of different groups these include

1)      Those with children where one or other of the parents, or parents live in partner works more than 16 hours a week.

2)      People over 25 working more than 25 hours a week

3)      Disabled workers working more than 16 hours

4)      People over 50 who are returning to work for more than 16 hours a week.

The credits are paid into the recipients bank account and are directly related to their personal economic circumstances and those of their families.  Those on the lowest incomes and with the highest number or most vulnerable children receive more money than those on an higher income or with fewer children.

In the 2008-2009 tax year the tax credits payments increased but more significantly the income threshold at which working tax credits began to reduce was increased from £5220 to £6420.  This effectively meant that a person could earn £1200 more a year before their tax credits began to decrease.  Those who claimed the child only element of the credit could earn £1080 more a year before the payments began to reduce.

If a person's circumstances meant that they were part of any of the above groups then financially they were not adversely effected by the abolition of the 10% band.

Although the abolition of the band had been announced a year earlier when the new 20% rate band was introduced there was vocal opposition from a number of MP’s in all Parties.  As your local MP I made the case to the Chancellor alongside other backbenchers for a fairer system. This pressure resulted in an amendment being announced by the Chancellor.

Increase in the personal allowance

As tax credits are not all encompassing, people under 25 with no children and those with no eligible children who work less than 25 hours a week even if they are on very low incomes cannot claim tax credits.  This was especially hard on young low paid workers, low paid part time workers with no children and low paid part time workers whose children had grown up and left home.  To ensure that these individuals were not significantly worse off the Chancellor Alistair Darling has increased the personal allowance by £600 meaning the income level at which a person starts to pay tax has increased from £5435 to £6035 or from £104 per week to £116 per week. 

Winter fuel increase for those aged between 60-64

The increase in the personal allowance is also accompanied by an increase in the winter fuel allowance of £50, paid as a one off payment to those between 60 and 64.  This group would be particularly affected by the abolition of the 10p tax band, as they are more likely to work part time and less likely to have eligible children living with them and therefore they were ineligible to claim tax credits. 

To compensate for any adverse effect the abolition of the 10% tax band could have, tax credits were increased to ensure that the most vulnerable did not suffer.

Tax credits were introduced in 2003 and so awareness of who can claim could be low amongst certain sectors of the community.  Those who are now over 25 on low incomes without children may not realise they are eligible, people who have just had their first child, and  those who have reduced their hours for any reason and were previously not entitled to claim may now be eligible.

It is especially important that lower paid union members check to see if they can claim. Eligibility can be checked via the HMRC website or for those without internet access or who would prefer to speak to an advisor a helpline is also available. In the current economic climate with restrictions on wages and rising prices it is important that the help provided by the government is claimed by those who are entitled to it.  The advice is that it is better to make a claim and not be eligible than to miss out on income that is due to you.