The announcement by the government to compensate UK taxpayers for the abolition of the 10p income tax rate has been described as a huge "U Turn" by many media commentators but what does it mean?

The personal allowance for the tax year 2008 - 2009 will be increased to £6,035 from £5,435, a compensation equivalent to £120 for each basic rate taxpayer. There is no increase in the amount of tax higher rate taxpayers are liable to pay. The threshold limit, however, for the higher rate band has been reduced from £36,000 to £34,800.

According to the chancellor, basic rate taxpayers will see the benefits of the new measures in September, with an initial one-off increase of £60 to monthly salaries, and an extra £10 per month for the rest of the financial year.

The concession by the government is good news for the majority of taxpayers, especially as the move applied to the entire financial year, and is backdated to April. It was estimated that 4 million people were worse off by the abolition of the 10p tax rate. This announcement has left 22 million basic rate taxpayers better off.