The government's complicated changes to tax and benefits have begun, squeezing most households in real terms
The government's fiscal tightening to fill the structural deficit in the public finances is about to begin in earnest with the new financial year now upon us. Significant public service spending cuts will start to hit. And on top of the recent VAT increase and last year's introduction of the 50p tax rate, further changes to direct taxation, tax credits and benefits have been introduced today which will impact on households' incomes.
All national insurance rates have increased, there are cuts to tax credits and housing benefit and the temporary increase in winter fuel payments that has been in place for the last two years will not be repeated this winter. This is also the first time that the consumer prices index (CPI) rather than the retail prices index (RPI) or the Rossi index has been used to uprate most benefits and tax credits (with the most notable exceptions being the basic state pension and the pension credit guarantee), which means that they will only increase by 3.1% this month rather than the 4.6% or 4.8% they would otherwise have done.
But in the midst of these changes, which will tend to reduce household incomes, there are a few giveaways: the income tax allowance for under-65s and the threshold for paying employee's national insurance will be increased in real terms, and the child element of the child tax credit and the pension credit guarantee will be increased. This leads to a complicated pattern of winners and losers from the changes as a whole, which varies by income, family structure and consumption patterns among other things.
After the budget, the Institute for Fiscal Studies analysed the distributional impact of the changes being introduced today. We saw then that, if we split households into 10 equally-sized groups based on their income, the poorest eight of these 10 groups are better off on average as a result of changes that have just been introduced. But this is not to say that eight out of 10 people will be better off ? each group contains a significant number of winners and losers.
Households with children are more likely to lose from the changes than those without, as tax credits are means-tested more aggressively, the childcare element of the working tax credit has been made less generous and child benefit and working tax credit rates are frozen in cash terms. However, some non-working families with children will be better off overall as a result of an increase in the child element of the child tax credit, which offsets the loss from using the CPI to uprate most of the benefits they receive. In contrast, basic-rate taxpayers without children will tend to gain: for those earning less than �35,000, the increases in the income tax personal allowance and the threshold at which employees start paying national insurance more than offset the higher national insurance rate. Higher-rate taxpayers will lose out, however, as the threshold at which the 40p rate starts to be paid has been reduced, meaning that they will have to pay the higher rate of income tax on a larger slice of their income.
Pensioners are less affected by measures being introduced in this tax year. All pensioner households will see lower winter fuel payments this year as a temporary increase that has been in place for the last two winters has not been extended ? those aged under 80 will get �200 rather than �250 this winter, and those aged 80 or over will receive �300 rather than �400 ? but this will be offset for poorer pensioners claiming means-tested benefits by an increase in the level of the pension credit guarantee.
Of course, tax and benefit measures being introduced in this financial year only constitute a small part of the overall fiscal tightening package. Indeed, the VAT rise that came into effect in January represented a greater net "takeaway" from households than these measures, and there are further cuts to welfare spending coming in over the next three years that will further reduce household incomes.
In particular, families where one parent is a higher-rate taxpayer will lose their entitlement to child benefit from January 2013. And given the governor of the Bank of England's warnings about stagnant real earnings growth, households are likely to be feeling the squeeze for some time to come.
Source: http://www.guardian.co.uk/commentisfree/2011/apr/06/winners-losers-new-tax-year
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