The Chancellor has now announced that there will be some form of compensation for some of those who will have lost out from the abolition of the 10% tax rate. What form will this take, and who will benefit? The Business Lounge tries to find out.

In fact, the details of the compensation have not been announced (or apparently even determined) and the Chancellor has said he plans to do this in the Pre-Budget Report. This is usually made in the autumn and historically was a preview to the next Budget. However, more recently it has been used almost as a mini-budget to announce new tax rules. More on the timing of these concessions below.

Who is the Chancellor trying to help?

As we have previously explained in our article on the 10% tax rate, people with income between £7,665 and £18,815 are adversely hit by the changes in tax rate from April 2008.

The circumstances of these people - whether they have children, where they live, how many hours they work, and how old they are - will vary completely. Therefore, any form of concession which tries to target particular disadvantaged groups is bound to be complex. However, the indications in the Chancellor’s letter to the Treasury Select Committee, are that this is precisely what he will do, rather than give a straight compensation payment to all those affected.

Two groups have been highlighted.

“Other low paid workers without children”

The implication here is that low-paid workers with children are already helped by the Child Tax Credit and Child Benefit. Individuals do not have to have children to benefit from the Working Tax Credit, but even if they don’t there are still other conditions that have to be met, including a minimum number of hours worked in a week (30, in many cases) and, with some exceptions, a minimum age of 25.

The Chancellor has said that he may make direct payments to address the issue for these “low-paid childless” individuals, or that he may change the tax credit system. Speculating, perhaps he will do this by amending these requirements relating to age and hours worked, or other conditions, in order to benefit more individuals, or by increasing the amount of credit available.

“Pensioners under 65″

This group of pensioners (aged 60-64) do not benefit from the increased personal allowance available to those aged 65 plus. The personal allowance is the annual amount of income you can make without paying any tax on it. In 2008/2009 (i.e. the current tax year), this is £5,435 for individuals under 65 (£5,225 in the prior year).

Those aged 65 and over have enjoyed better allowances in the past but in this year in particular, there has been a large increase such that people 65 plus have a personal allowance of £9,030 (£7,550 last year) and those aged 75 plus can make £9,180 before paying income tax (£7,690 last year).

However, rather than decrease the qualification age for these enhanced allowances, the Chancellor has hinted that the Winter Fuel Allowance could be tweaked in order to benefit pensioners aged 60-64.

When will the changes take effect?

In the Chancellor’s letter to the Treasury Select Committee, the following statement was made:

“As a sign of the Government’s intent, we do not wish to wait unnecessarily until November [i.e. the Pre-Budget report]. Whatever conclusions we come to, all the changes will be backdated to the start of this financial year.”

Either way, we expect several “add-ons” rather than one simple action.

As with all our information in The Business Lounge, this is not comprehensive tax advice, and may not apply to your specific circumstances; to discuss how these issues affect you, contact your accountant.