Darling pledges 10p tax compensation

The chancellor has seen off the threat of a backbench rebellion by agreeing tocompensate the losers from the 10p tax rate abolition.

In a letter to the chairman of the Commons Treasury committee on Wednesday, Alistair Darling sought to persuade MPs that the government is listening to their concerns by pledging to review tax credits, the minimum wage and the winter fuel payments system.

Darling said he would assess the average impact among the estimated five million people, mostly 60 to 64-year-olds and childless low-paid workers, who have lost out from the changes.

And he said that all changes would be backdated to the start of this financial year.

Labour MP and former welfare minister Frank Field, who had tabled an amendment demanding compensation, immediately withdrew the motion.

The chancellor said in the letter that: "For pensioners aged 60-64, whose incomes tend to be more stable, we have put in hand work to see if those households who have lost out from the removal of the 10p starting rate of income tax can be helped through the mechanism that already exists to pay the winter fuel allowance.

"As a sign of the government's intent, we do not wish to wait unnecessarily until November. Whatever conclusions we come to, all the changes will be backdated to the start of this financial year.

"For other low-paid families currently outside the working tax credit system, while we will examine in our review all practical propositions, our focus is on potential changes to the tax credits system to allow the average losses from the removal of the 10p starting rate of income tax to be offset.

"At the same time, the Secretary of State for Business, Enterprise and Regulatory Reform and I have asked the Low Pay Commission to report on what changes could be made to the minimum wage regime to support younger workers. We will look at other measures alongside this."

The announcement came as Gordon Brown faced the prospect of the government's Finance Bill being defeated by MPs next week with 46 of his own backbenchers having signed Field's amendment opposing the measure.

But the Birkenhead MP said: "The chancellor's statement this morning is to be welcomed.

"He is actively seeking ways of compensating workers made worse off by the loss of the 10p starting rate of tax, either by changing personal allowances and tax codes or by changes to tax credits.

"It is terrific news for our constituents who earn modest wages and salaries and for Labour MPs who have been actively supporting their campaign

"The government has listened, and more importantly, acted upon what many Labour MPs have been saying, and I shall now be withdrawing the amendment to the Budget that stands in the name of nearly 50 Labour MPs."

McFall, whose committee had announced an inquiry into the tax changes, also welcomed the "clear commitment to help the low paid".

Speaking in the Commons, he called on the government to "seriously consider our recommendations" as part of the review.

However the prime minister's spokesman denied that the review amounted to a U-turn.

"There is no question of not going ahead with the abolition of the 10p tax rate. It was the right thing to do," he said.

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