Darling buys way out of trouble with £120 boost for 17 million taxpayers

Alistair Darling was forced to rewrite his Budget provisions (AP Photo/Akira Suemori)

Seventeen million basic-rate taxpayers will receive a tax cut of £120 this year after Alistair Darling, the Chancellor, announced a £2.7bn handout to compensate the low-paid who were set to lose out over the abolition of the 10p tax band.

The extent of the climbdown by Gordon Brown – amounting to the rewriting of the Budget – startled critics and staved off the Labour rebellion against scrapping the 10p tax. Tories condemned the move as the biggest by-election bribe since Harold Wilson announced the building of the Humber Bridge in 1966.

Unveiling, in effect, a mini-Budget, the Chancellor announced the raising of personal tax allowances by £600 – meaning anyone earning up to £40,835 will gain £120 this year and it will be backdated to 6 April. From September, when the change takes place, basic-rate taxpayers will receive a one-off increase in their monthly income of £60 and then an increase of £10 per month for the rest of the financial year.

About 4.2 million of the estimated 5.3 million "losers" from the abolition of the 10p tax band will, in this way, be fully compensated. That leaves 1.1 million low-income earners about £2.23 a week worse off. But that is half the amount they were set to lose, said the Chancellor. Most are the lowest paid, earning between £6,635 and £13,355, according to the Conservatives.

The starting point of the 40p upper rate of tax is being lowered from £41,435 to £40,835 to stop higher earners benefiting from the measure. That means 150,000 people will be dragged into the higher tax rate, but they will not lose out because of other adjustments made by the Treasury. The cost of the package is being met entirely by increased borrowing.

Frank Field, the maverick former welfare minister who led the Labour revolt, said he endorsed the proposal and personally apologised to Mr Brown, who was on the front bench, for allowing his campaign against the 10p tax reform to "get personal" at the weekend.

The package was manifestly timed to try to rescue Labour from a humiliating defeat in next week's Crewe and Nantwichby-election and save Mr Brown from suffering more damage at the hands of voters. All Labour backbenchers and ministers have been ordered to campaign in Crewe and Nantwich this weekend by Harriet Harman, the party's deputy leader, and Geoff Hoon, the chief whip.

But the 10p tax miscalculation may have done lasting damage to Mr Brown's authority that the hasty rewriting of the Budget will not repair. Today, the Prime Minister will begin a fightback with a draft Queen's Speech promising help for families on "bread and butter issues" such as housing, jobs and the economy. The speech will also address the criticism that Labour has thrown away its claims to be the party of social fairness. "There is a sense out there of unfairness. They think it's unfair they cannot get on the housing ladder, or get jobs and that people coming into this country are not making a contribution. Economic fairness will be the key theme," said a senior government source.

The Conservative leader, David Cameron, is still expected to pull off a major by-election victory in the seat on 22 May. George Osborne, the shadow Chancellor, accused Mr Darling of a "cynical" by-election bribe.

Joe Harris, head of the National Pensioners Convention, said pensioners would still lose out. "Under the old system, a pensioner aged 60-64 with an income of £10,000 a year would have had an annual tax bill of £782. Even with Mr Darling's extra £600, the same pensioner will pay £793 in tax – still leaving them £11 worse off."

Details of the new deal

More than a million people who lost out from the scrapping of the 10p rate of income tax will still be worse off this year – even after yesterday's move to increase the threshold. Ironically, the biggest winners will be the middle classes – those earning c.£30,000 – some of whom will be more than £450 a year better off than they were before the 10p rate was scrapped, and the basic rate of tax was cut from 22p to 20p. Here's a rough guide to how the changes will affect each group:

* c.£5,400 – £6,800. People in this income bracket will be better off than they were before the 10p rate was scrapped last month, especially those with children. It means they can claim more tax credits.

* c.£6,800 – £10,000. While better tax credits will help families take home more money than they were before the 10p rate was scrapped, single people here will be worse off by about £30 a year.

* c.£10,000–£41,000. Most will be at least £120 a year better off than they were before the 10p rate was scrapped. Furthermore, while those earning above £12,000 received a boost from the tax changes in April, yesterday's tinkerings will put more money into their pockets. A single person on £32,000, for example, will be £452 a year better off.

Above c.£41,000. No difference. But this income bracket will still retain the benefit that they received from the scrapping of the 10p rate last month – leaving them £292 better off a year.