Alistair Darling delivered his Pre Budget Report against a background of one of the worst economic positions in living memory. It was not an occasion for “giveaways”. But mercifully there was little to make the plight of those on the lowest incomes any worse than anticipated.
Cost of buying (VAT)
It was already known that value added tax would rise by 2.5% from January, but as we commented when the rate was reduced a year ago, the impact on people with low incomes is relatively small as food, children’s clothing and fuel are not affected. Still, it might add a couple of pounds a week to the general costs of an individual.
Personal allowances and tax rates
By law, personal allowances are uprated year on year by reference to the increase in the inflation rate. This year for the first time since this law was introduced there is actually a decrease year on year in the inflation rate.
The Chancellor has therefore frozen the personal allowance rates.
The impact of this freezing, coupled with increases to both the State Pension and Pension Credit limits, will add to complexity for women in the age range 60-64 as they try to work out how the tax they pay interacts with the benefits they receive. This was alluded to by the National Audit Office in their recent report HMRC: dealing with the tax obligations of older people.
The personal allowance position looks like this:
|Personal || |
|Up to age 64 ||£6,475 ||£6,475|
|Aged 65-74 ||£9,490 ||£9,490|
|Aged 75 and over ||£9,640 ||£9,640|
|Married couple || |
|One of a couple born before 6 April 1935 ||£6,965 ||£6,965|
|Blind person's ||£1,890 ||£1,890|
Tax rates remain unchanged at 20% for for most on lower incomes, unless they qualify for the 10% savings rate.
Nothing much changes for next tax year 2010-11 for those on low incomes. The lower threshold for starting to pay national insurance contributions does not move from £110, but the lower earnings level at which you get credit for State benefits moves from £95 per week to £97, so eroding future benefits for those on low incomes. A small change, but unwelcome.
After all sorts of trailed changes in the press before the PBR the documents appear silent on the subject of childcare vouchers. That is no surprise to us as there was great confusion amongst commentators about the advantages or otherwise of the various leaked proposals.
Any of the previously proposed changes would not have affected low income workers who, generally, are better off receiving the childcare help under the working tax credit regime rather than sacrificing salary for vouchers.
We remain concerned that some people who are receiving childcare vouchers are also mistakenly claiming support through the childcare element of working tax credit on the same childcare costs. Many have been misled by poor advice from some voucher companies. The resulting tax credit overpayments are often large.
Child Trust Fund
As announced in Budget 2009, disabled children in receipt of Disability Living Allowance at any time during the 2009-10 tax year will receive an additional payment of £100 into their CTF account from April 2010.
The State Pension will rise by 2.5% from next April.
The Chancellor announced some small, but important, changes to the tax credit system.
Something which LITRG has been pressing for over the last two years is now going to happen. This is the introduction of a so-called notional entitlement. What it means is the removal of an unjust anomaly when a claimant often innocently delays in reporting a change in their couple or single status . This represents a significant triumph for the voluntary sector. The HMRC statement is reproduced below:
“For people who start living together or separate who report the changes late, HMRC will take into account what they would have been entitled to receive had they reported the change promptly in determining any overpayment from their old tax credits award. When calculating the overpayment, HMRC will offset any Tax Credit award they would have been entitled to had they reported the change promptly. This will start in January 2010. Further details will be set out later in guidance.”
People who aged 65 and over, a small but growing population of tax credit claimants, will be able to claim working tax credit if they work 16 hours a week.
Previously they could qualify on the basis of a 16-hour week only if they were responsible for children, or if they were disabled, or if they were returning to work after a period on benefits.
Otherwise they had to be working at least 30 hours a week. We welcome this initiative, even though we would have preferred to see it extended to all State pensioners to bring in women from age 60.
Small rises in the various tax credits rates are confirmed.
Child benefit is also rising by 1.5%.
The HMRC press release sets out the tax credit and child benefit scene.
Other benefit changes
In a report we published jointly with Community Links and Child Poverty Action Group in 2007, we showed that free school meals can often be the deciding factor in whether someone is better off in work than on benefits. At present, in England, families in receipt of Working Tax Credit are generally not entitled to free school meals.
We therefore welcome today’s announcement that by September 2011 free school meals will be extended to all primary school children in working families who have a household income below £16190. We also welcome the Government’s commitment to extend the universal free school meals pilots so that there is at least one pilot in each region of England.
Guardian’s allowance increases from £14.10 to £14.30 per week from next April.
Mortgage interest help for those on benefits will be extended for a further 6 months.
Guaranteed work, training or community service will be available for all young people 24 and under who have been unemployed for 6 months or more.
Giving priority to schools, hospitals, and other areas of government will inevitably lead to further job cuts in HMRC. As we pointed out in our latest article, unless these are accompanied by radical changes in processes there is likely to be a further deterioration in HMRC service levels, which always bear hardest upon those with the lowest incomes.
The informal economy
We welcome the Government’s decision to set up a Hidden Economy Advisory Group, to ‘examine the tax system and HMRC’s administrative processes and consider whether they facilitate or prevent people from joining the formal economy’.
We believe that many people who work without declaring their earnings do so not with any intent to deceive, but because working for such low wages they cannot afford to lose their benefits.
Much could be done to ease the situation by enabling welfare claimants to earn more while still receiving benefits, or synchronising the national minimum wage with the starting point for payment of tax and NIC or claiming working tax credit.
We also welcome the announcement that where a taxpayer in self-assessment has not submitted a tax return and has missed all appeal deadlines against HMRC's determinations of their liability, HMRC will still forego any tax that is legally due but which the taxpayer can show is excessive.
At present this practice exists in the form of a concession. In the Budget, HMRC proposed to abolish the concession, but following representations from a number of bodies and individuals, have agreed to enact the substance of it as legislation.
Contact: John Andrews (0844 579 6700 Fax 0844 579 6701)