PM challenged to extend tax cut

The Prime Minister insisted he wants to help low-income households, but told MPs they must wait until Chancellor Alistair Darling's Pre-Budget Report in November to find out whether he will renew the handout, introduced to compensate losers from the scrapping of the 10p income tax rate.

Mr Cameron said it was now clear that the package was a "one-off one-year-only change" and accused the PM of planning a "tax con".

The exchange came on the eve of the Crewe and Nantwich by-election, which has been dominated by the row over the 10p rate, which cost 5.3 million low-income workers up to £230 when it was abolished by Mr Brown in his final Budget as Chancellor.

Some 22 million people will gain up to £120 this year as a result of Mr Darling's decision to raise the threshold for the basic rate of income tax, funded by adding to Government borrowing.

But the report by the Institute for Fiscal Studies (IFS) warned that by 2010/11, 18 million families would be worse off by an average of £150 a year compared to now unless the changes - together with top-ups to the winter fuel allowance - were extended.

With political pressure to avoid unpopular tax rises ahead of a general election, the IFS said the Government may be tempted to increase borrowing again rather than reverse the changes, even if it means breaching its own tax and spending rules.

At the same time, the IFS warned that almost 1 million of the poorest families would still lose out this year as a result of the abolition of the 10p rate.

Raising tax thresholds this year is already set to take borrowing to "within a whisker" of the Government's self-imposed ceiling of 40% of national income and the limit will be breached by about £5 billion if it is extended into future years, said the IFS.

"By announcing a big, one-off increase in the personal income tax allowance, Alistair Darling has not only created millions of winners this year, he has created millions of potential losers next year," said IFS director Robert Chote."