Alistair Darling must do more to help the 1.1m low-income households still losing out as a result of the scrapping of the 10p tax rate, MPs have said.

A £2.7bn emergency package announced by the chancellor last month did not go far enough, the cross-party Commons Treasury committee said in a report.

The money had not been “well-targeted”, with £2bn going to middle-income workers who had not lost out, it added.

Mr Darling has said he wants to do more to help those not already compensated.

The committee’s report said the chancellor’s decision to raise the income tax threshold by £600 in May, at a cost of £2.7bn, was “probably the least bad option” to mitigate the impact of the abolition of the 10p rate.

“The government’s short-term priority must be to make every effort to compensate these people in full” John McFall Committee chairman

It found the 5.3m losers from the initial decision were people on low incomes for whom the loss of up to £232 a year had dealt a “significant” blow to their finances.

This, it noted, came at a time of sharply rising prices for essential goods and services.

Some people were still estimated to be up to £112 a year worse off, the report said.

Young workers

The committee found most of those affected were younger workers on low incomes with no children, but the worst-hit group were women between the ages of 60 and 64 with small work pensions.

Committee chairman John McFall said: “The government’s short-term priority must be to make every effort to compensate these people in full.

“The government must not let this issue slide into the background and will need to produce fresh proposals to fully compensate these 1.1m households by the time of the 2008 pre-Budget report.”

The MPs noted the government had yet to make clear whether the package of help given this year – funded by extra state borrowing – would be repeated in the future.

However, any new measures to help those losing out should be made through the tax system, the report suggested.

Child poverty

Frank Field, the Labour backbencher who led the rebellion against the scrapping of the 10p tax rate, said the government’s compensation package was not equal to one million people’s loss.

He said: “We will be looking, when we debate this in the Commons, and when the government promises it will come back in November, for a proper settlement for everyone who lost out on 10p.”

The committee called on Mr Darling to use his autumn pre-Budget report to launch consultations on future changes to income tax, rather than keeping them secret until Budget day.

“The government must now ensure that there is no backsliding and that future reforms to the tax and benefit system do not reverse this very positive development,” said Mr McFall.

The MPs also warned that the immediate need to compensate those who lost out after the scrapping of the 10p tax rate should not detract from the challenge of tackling child and pensioner poverty.

The report called for the creation of a Poverty Commission to look at the effect of public policy on the poorest families.

The decision to scrap the 10p tax rate, made by Gordon Brown in his last Budget as chancellor, came into force in April this year – alongside a reduction in the basic rate of tax from 22% to 20%.

It had threatened to provoke a backbench rebellion by Labour MPs

News reported by BBC