WHEN Gordon Brown announced the abolition of the 10p income tax band a year ago to fund a cut in the basic rate from 22p to 20p, he claimed one reason was to make taxes simpler. Now he has discovered that his promise to compensate the losers from the change will be anything but.

The sums are straightforward. The abolition of the 10p rate brings in £7.3 billion to the Treasury this year, rising to £8.6 billion in 2009-10. The cut in the basic rate will cost £8.1 billion this year, rising to £9.6 billion next.

The net losers from the abolition of the 10p rate, one in five, or 5.3m, mainly low-income families on annual earnings of up to £18,000, lost substantially less than £7 billion to £8 billion, however. Their combined losses, according to the Institute for Fiscal Studies (IFS), were about £700m. This is because while many taxpayers “lost” from the abolition of the 10p rate, including people at the top of the income scale, they gained more from the 2p cut in the basic rate. So Brown’s U-turn apparently just requires the Treasury to stump up £700m in compensation.

Sadly for the prime minister there is no neat way of doing this, according to Robert Chote, director of the IFS. Compensating one group of losers, women aged 60-64, could be done through the winter fuel payment, as ministers have suggested. But equal opportunities legislation means men of that age would also have to be rewarded. Vince Cable, the Liberal Democrat shadow chancellor, would benefit.

Raising tax allowances to benefit the low-paid would cost £6 billion, almost as much as abolishing the 10p rate. Boosting tax credits to help those affected would cost a conservative £2 billion£3 billion, would not help everybody and could not be backdated.

Short of identifying every loser and delivering personal cheques to them, Brown cannot solve the problem he has created.

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