Increase in personal tax allowances for the poor offset by other measures
Wednesday 23 June 2010
It could have been worse, may just be the judgement of those on the lowest income. The biggest single increase in income tax personal allowances in history sees the amount that can be earned before income tax rise from £6,475 to £7,475 in April 2011, taking 880,000 people out of the income tax system at a stroke.
Many of those gains, however, will be eroded by lower benefits and other changes to the tax system.
"This move is most welcome with so many people being potentially lifted out of the tax system and will increase incentives to work," said Robin Williamson from the Low Incomes Tax Reform Group.
More could be on the way as George Osborne, the Chancellor, said the rise was a downpayment on future personal allowance increases which could see the threshold rise to £10,000.
However, there is a potential for more people to be caught in the trap of income from work barring them from claiming benefits. "There is a catch – those who are employed but still claiming benefits could find their entitlements reduced as payouts are based on after tax earnings rather than before tax," Mr Williamson said. "Therefore, much of the extra money earned, in some cases, could be lost through lower benefits which means living standards won't rise."
On the plus side, many of the reforms of the tax credit system outlined yesterday are less likely to hurt low income groups. The main pain seems to be reserved for middle and higher income groups who will see their tax credit payouts reduced or, in the case of families earning more than £40,000, starting to disappear altogether.
However, the Chancellor underlined his commitment to keeping Gordon Brown's tax credits by increasing the child element by £150 per child above inflation. As a result, the Chancellor pledged that there would be no overall rise in levels of child poverty – which the last government had pledged to halve by 2010 and abolish by 2020 – for at least two years. Less happily, childless single low earners, who were big losers when the 10p income tax rate was abolished, saw no similar inflation-busting tax credit payday.
In the public sector which is threatened with swingeing cuts and job losses, the pay freeze announced to cover the next two years will not apply to those on less than £21,000 a year – roughly 10 per cent below the average UK wage. Instead, low earning public sector workers have been told they will be given a flat rate pay rise worth £250 in total in both years when their higher earning colleagues' pay is frozen. That said, with average government departmental spending cuts of up to 25 per cent – outside of the NHS and international development – many low paid public sector workers may soon be looking for another job.
One potential positive of the spending squeeze is that the Chancellor has pledged that any local authority which is able to put a cap on spending will receive central government support in order to keep their council tax bills frozen next year, with the aim of relieving the pressure of family finances among whom are many low earners.
But those who don't earn and rely on state benefits will have the pain of the VAT rise to cope with as well as substantial benefits cuts. New housing benefit claims will be capped at £400 a week, the health in pregnancy grants will be abolished. A new medical assessment will be introduced for those on disability living allowance, no doubt to help cut the claimant count. As for those who keep their benefits, they face having increases pegged to the much lower consumer price index rather than the retail price index.
The total saving to the government of these measures is £11bn by 2014/15, money which will make a hole in the pockets of some of Britain's poorest. The Treasury's own forecasts show that by 2012-2013 that the measures in the Budget will shave about 1 per cent off the incomes of those earning less than £14,000 a year.
Gingerbread, the charity for single parents said that at first glance the overall impact of the Emergency Budget would be "broadly neutral", with the increase in child tax credits offset by the rise in VAT. "But families may start to fall behind as benefits rise more slowly over time and child benefit freezes," said Fiona Weir, the chief executive. "These cuts will really hit families with young children hard."
Mothers in receipt of child benefit will be disappointed that the usual annual increase in line with earnings will not happen as payouts are frozen for the next three years.
Mixed picture for low paid
880,000 people taken out of the income tax net by the rise in the personal allowance
£40,000: the level of family income above which tax credits will now be withdrawn
1%: the loss of income the Treasury estimates will be felt by those earning less than £14,000 a year
Case study: 'It will be harder for my child to go to college'
Kay Wilkinson, 36, from Pendle, has a daughter Daisy, five, and a two-year-old son, Sol. She voted Liberal Democrat in the general election this year. Her household income is around £24,000.
"The freeze in child benefits for the next three years is going to hit me hard. It is currently at a reasonable level. I am not looking for the Government to increase it, but inflation will eat away at it. It should be linked to the cost of living. After all, that is what it is supposed to help support.
"When I left work, it was because I thought it was important to spend the first years of my children's lives at home. My family currently gets around £4,000 per year in child benefits and, without that money, I would be forced back into the first job which came along. I would not be able to spend that time with my children and they would not benefit from their mum being home.
"The value of child benefits will fall over the next three years as inflation eats away at it. The money we receive is used to cover childcare expenses like nappies and daycare, if necessary, so we will have to find that money from somewhere.
"I am very pleased that the threshold for reductions in family tax credits has been set at £40,000 – that's reasonable. I had worried it would be set at £20,000, and if that had happened my family would have been in trouble.
"I am also worried that it seems it will be harder for children from families with lower incomes to get into university in the future. We have thought about it and are trying to put some money into a trust fund for our children. But I worry that might not be enough when they reach school-leaving age."
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