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Brown’s tax reforms boost overall pay

By Andrew Taylor, Employment Correspondent

Published: May 7 2008 21:22 | Last updated: May 7 2008 21:22

The tax changes that led to Labour’s ongoing 10p tax revolt have increased pay packets overall, according to the company that processes 90 per cent of salaries.

Gordon Brown, in his last Budget as chancellor, announced plans to cut the basic rate of income tax from 22 to 20 per cent, while scrapping the 10 per cent starting band.

VocaLink, which tracks salary movements, said the basic-rate cut, which came into force last month, had boosted overall take-home pay, which rose at an annual average rate of 4.2 per cent in April – the biggest rise for 18 months.

“The reduced level of income taxation for those earning between £19,000 and £40,000 has boosted VocaLink’s take-home pay index to the highest level since September 2006,” said Douglas McWilliams, chief executive of the Centre for Economics and Business Research.

Stuart Adam, senior economist at the Institute for Fiscal Studies, said twice as many people had benefited from last year’s tax changes as had lost out.

“On average, even those on low incomes gained from the reforms, due to an increase in tax credits and personal allowances,” said Mr Adam. “The losers were primarily working-age people without children who earned less than £19,000 but were not receiving tax credits.”

The biggest gainers from the tax changes would be people earning just over £36,000, who would be about £336 better off, he added.

About 5.3m people are estimated to be worse off as a result of scrapping the 10p band. Alistair Darling, who took over as chancellor from Mr Brown, told MPs this week that all options were being considered to help those hit by the tax changes.

The latest rises in take-home pay are likely to alert members of the Bank of England’s interest rate-fixing monetary policy committee, concerned about potential inflationary pressures.

Richard Cooper, marketing director at VocaLink, said: “The substantial rise in overall take-home pay in April, allied to strong retail sales numbers, implies a greater confidence from consumers than many would suggest.’’

Official figures showing increases in gross average earnings, which take no account of tax changes, have so far remained below levels that the Bank might consider a serious threat to its inflation target. But the MPC would become concerned if take-home pay were to rise too rapidly.

VocaLink found the biggest rise in take-home pay in the services sector, where the annual rate of growth increased by 1 percentage point last month to 5.2 per cent, the highest level since June 2006. Pay growth in the manufacturing sector, by comparison, remained subdued at 2.4 per cent, “as wages are held down to boost competitiveness”.

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