The Government in Crisis: Taxation scheme for invalidity benefits

HUNDREDS of thousands of claimants judged unable to work are set to lose from Treasury proposals to tax invalidity benefit.

The move would come on top of the expected announcement next month that the benefit is to be frozen from April, or only increased in value by less than inflation.

The attack on the pounds 5.25bn cost of invalidity benefit is likely to be only one of several benefit cuts Conservative backbenchers will be asked to back as the price for protecting capital projects while holding Government spending down.

Labour yesterday produced a leaked Treasury note, and a draft letter from Peter Lilley, Secretary of State for Social Security, showing officials from both departments working on taxing the benefit from 1994.

With the recession continuing to reduce government income while pushing up the benefit bill, the Treasury is known to be looking hard at taxing a range of benefits to balance the books.

Donald Dewar, Labour's social security spokesman, accused Mr Lilley of planning 'a double hit' - cutting the benefit's value and seeing it taxed. He said: 'This is a Treasury raid, part of the price to be paid for Mr Lamont's economic mismanagement.'

Mr Lilley's draft letter - on which his department refused to comment yesterday - shows him not opposing taxation in principle, but arguing against a decision next year. The timing should be tied in with the results of a major review of IVB already under way.

The Treasury note, which promises a further report to ministers at the end of this month, concludes that taxation of IVB from April 1994 is feasible, but involves some 'serious difficulties'.

While Mr Lilley argues that changes he already plans would reduce the tax take, without those taxation would raise pounds 500m on the pounds 5.25bn cost of the benefit, cutting the income of about 900,000 of the 1.4 million claimants, of whom 250,000 would lose more than pounds 15 a week. About 75,000 recipients with no other income would pay tax, 55,000 of them paying more than pounds 100 a year.