Average earners hit by tax changes, report claims

"Middle England" families with two working parents will pay an extra £1,467 a year in tax by 2011-12 as a result of all the changes made to the system since Labour came to power.

Analysis of the Chancellor's pre-Budget report by the independent Institute for Fiscal Studies confirmed: anyone earning less than £20,500 a year will be worse off by 2011; the wealthiest 60 per cent of the population will pay more tax; and the cut in VAT from 17.5 per cent to 15 per cent will favour better-off families.

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The verdict on what will happen to an average family's income implies that Labour will promise higher taxes for comparatively modest earners during the next election campaign, which must come by mid-2010. The institute said claims in the pre-Budget report that "people with incomes below £40,000 will not pay more income tax and national insurance in April 2011 than in April 2008" were valid, but only if the proposed 2011-12 tax and benefit system was compared with the one in place in April 2008, before the Government announced a £600 rise in the personal allowance.

"If one compares the actual 2008-09 tax system with that proposed for 2011-12, only working-age individuals with annual earnings below around £20,500 will pay less income tax and NICs in 2011-12 than they would under an [indexed] 2008-09 tax system."

By 2011-12, the average household would be £385 a year worse off than in 1997, with two-earner families with children £1,467 a year worse off and two-earner couples without children £2,209 a year worse off.

The shadow Chief Secretary to the Treasury, Philip Hammond, said: "This report exposes the scale of Gordon Brown's stealth tax raids on Britain's families."

The changes in VAT have drawn fire from the left. The institute says that the move is regressive because the richest gain the most: £17.94 a week from the 2.5 per cent cut, against £5.43 for the poorest 10th of the population.

The Labour backbencher Jeremy Corbyn welcomed help for pensioners and the unemployed but said the VAT cut was short term and not redistributive and the Government should do more to help the poor. The Liberal Democrat Treasury spokesman, Vince Cable, said: "Gordon Brown has tried to disguise tax rises as being progressive, but the reality is that with a £5bn national insurance tax raid, it will be average and below average income families who will be hit hardest."

On some measures, Alistair Darling's plans are the most socialist Budget proposals since 1974. The new 45p tax rate and the abolition of the personal allowance for those on more than £150,000 marks a step-change.

James Browne, a research economist at the institute, said: "This is the first time Labour has particularly targeted the top 2 per cent of earners and redistributed the money to the poor."

Overall, the richest 10th of the population will pay about £4,890 more tax than in 1997, while the poorest 10th will be £1,347 better off.