Small businesses will bear the brunt of the Chancellor’s changes to the tax thresholds yesterday, which were branded “crude” by economists.

Business groups said that the changes to personal allowances and the higher-rate tax threshold would translate into an administrative headache for small employers.

Stephen Alambritis, spokesman for the Federation of Small Businesses, said: “We’ve always suggested the best way forward on helping low-paid workers is through a healthy increase in the allowances. Nevertheless, this change halfway through the fiscal year will cause problems for small employers in particular.”

He added: “In particular, there are 1.2 million registered PAYE employers and there will be an administrative burden on their part to upgrade their systems.”

Brian Sloan, tax adviser at the British Chambers of Commerce, said that the changes could cause some smaller companies to lose money. “For some smaller firms, which are operating on the margins, it will impact on their profitability,” he said.

Economists said that the Chancellor, who was already boxed in financially, had left himself in an even more dangerous predicament by borrowing £2.7 billion to fund his giveaway.

In the Budget in March, which is now unravelling, Mr Darling was forced to raise the Treasury’s planned level of government borrowing in the new 2008-09 financial year by £7 billion, lifting the expected deficit for the year to a £43 billion – compared with the rather more modest £30 billion that Gordon Brown predicted in his own 2007 Budget. Now, borrowing will be even higher this year, climbing to at least £45 billion.

Charles Davis, an economist at the Centre for Economic and Business Research, an economic consultancy, said: “At the moment the Government is close to breaking its own golden rule on borrowing. In a climate where the economy is slowing, it doesn’t seem like a prudent move to borrow more now.”

Martin Weale, director of the National Institute of Economic and Social Research, said that taxpayers would most likely have to foot the bill for the Chancellor’s largesse at some time in the future.

He said: “It is a pretty good solution to the hole the Chancellor got himself into, but it does add to Government borrowing. Some of the beneficiaries of this move will probably have to pay higher taxes in the future, but the Chancellor is probably putting off worrying about the future until another time.”

Q&A

What is happening?
The personal tax allowance, which determines the level of income you can earn before paying tax, is to be raised by £600 this year from £5,435 to £6,035. The change only applies to taxpayers who are under the age of 65. The income needed to pay the higher 40 per cent tax rate has been dropped from £41,435 to £40,835

Why now?
The changes have been hurriedly introduced to compensate those who lost out from the decision to scrap the 10 per cent tax band

How will people benefit?
The change to allowances will be backdated to the start of the tax year on April 6. Basic-rate taxpayers under 65 will see a one-off increase in their monthly income of £60 in September. This covers six months’ payments since April. This will be followed by a monthly rise in after-tax pay of £10 for the rest of the year

Who will be the big winners?
Basic rate taxpayers under the age of 65 whose earnings fall roughly between £17,000 and £40,000

Will anyone lose out?
No, but 1.1 million workers who lost out from the scrapping of the 10p rate will still be worse off. The £120 will not be enough to compensate them for the cut in their take-home pay. This mostly affects the very low paid, earning £10,585 or less

What about higher-rate taxpayers?
They will be no better or worse off

Won’t the drop in the higher rate tax threshold mean more people pay tax at 40 per cent?
The Treasury estimates that an extra 150,000 people will be dragged into paying higher rate tax for the first time. However, it claims that they will still be better off as the extra tax they will be forced to pay will be offset by the £120 they gain

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