The key messages for those on low incomes arising from today’s Emergency Budget are:

• The poorest have been protected as far as is possible within the constraints of the debt situation. 
• Those on means-tested benefits will face a much tougher time unless growth in the economy provides them with jobs.
• The increase in personal tax allowances simplifies life for many on lower incomes, whilst changes to tax credits rules will cause more confusion.

With so many changes being announced we try below to sort out those which impact upon those on low incomes and when they are going to be introduced.

Tax changes

A range of tax changes were announced which will impact upon those on the lowest incomes.

Personal tax allowances

Personal tax allowances are to be increased by £1,000 as from April 2011. We welcome this as a simplification of the tax/benefits system. However, some beneficiaries of this change will be in receipt of means-tested benefits, entitlement to which is based on after-tax income.

Therefore, taking them out of tax will decrease their benefits entitlement, thus affecting their overall cash position.

For the very poorest an increase in personal allowances produces no benefit at all and for those on means-tested benefits (such as housing benefit or council tax benefit) the £200 saving (£1000 at 20% basic rate tax) can be reduced down to less than a £1 a week.

VAT increases

In a volte face to most statements made prior to the Budget, the rate of VAT is to be increased by 2.5% to 20% as from 4 January 2011. The primary exemptions, zero rating and reduced rates remain for those goods which are arguably the most important for those on low incomes i.e. food, children’s clothing, books and domestic fuel.

Capital gains tax

For those on the very lowest incomes capital gains tax is usually an irrelevance. However, when governments tinker with the rules for the wealthier sections of society, then those lower down can get swept up in the additional bureaucracy that follows.

We therefore welcome today's announcement that the annual exemption for capital gains tax will remain at £10,100, and that the rate of tax for any basic rate taxpayer remains at 18% so that the burden of the any increase in rates falls mainly on those with higher incomes.
 
However, we are disappointed to note the increase in the rate of tax to 28% for personal representatives of deceased persons. A death (or indeed a separation) can bring unexpected capital gains tax consequences.
 
We do, however, welcome the confirmation that adult placement carers will not face a bill for capital gains tax when they sell their home in which they have cared for their service users. 

Shared lives carers

The last Goverment's announcement of a new income tax relief for shared lives carers has been confirmed.
 
The new relief will extend the income tax relief enjoyed by foster carers to others who qualify for the description of shared lives carers. Our one concern is that people who are both foster carers and adult placement carers (for example, they care for a child under 18 and one who is over that age) will be worse off financially than under the old system. 

National insurance

The national insurance increases announced from April 2011 by the last government remain and employee contributions will be going up from 11% to 12% up to the upper earnings limit, and from 1% to 2% above the upper earnings limit. However the level at which employers start to pay NICs will be raised by £21 per week above indexation from April 2011.
 
New businesses will be exempt from up to £5,000 of employer NI payments for the first 10 employees hired, but subject to regional conditions.

The “sin” taxes

No further increases to the "sin" taxes of alcohol and cigarettes were announced.

Savings

It comes as no surprise that to encourage savings, the increased Individual Savings Account (ISA) limits from 6 April 2010 go unchanged at £10,200 a year per person (with a restriction of £5,100 on cash savings). These limits are to increase in future in line with inflation, starting from 6 April 2011. For lower income households, the Saving Gateway which was going to be launched next month has been axed.  

Paying tax

HMRC's scheme to introduce 'Managed Payment Plans' (which would have allowed taxpayers to spread tax payments either side of the due date) and which was planned for April 2011, has been shelved.

Universal benefits

In the benefits system there are a number of universal benefits which have been given to families regardless of their incomes and before the Budget there was intense speculation as to how they would be affected.

Child benefit

There was speculation that child benefit might either be taxed, means-tested or restricted. None of these are going to happen, but from April 2011 the benefit paid for children will remain frozen for the next three years.

Child trust fund

As trailed before the Budget, the Child trust fund is to disappear on a phased basis. The key features are as follows:

• Children born in the period August to December 2010 will get a £50 voucher (and a £50 additional payment if they are on a low income). Both these payments were previously set at £250.
• Children born from January 2011 will receive no child trust fund payments.
• Additional payments are made when a child reaches the age of 7. These will cease for children who reach the age of 7 after 31 July 2010.
• Children entitled to Disability Living Allowance receive an additional payment into their child trust fund for 2010/11. This will not be continued into 2011/12.
• Children in the care of local authorities will receive reduced payments after 31 July 2010 and no payments after 31 December 2010.

Because of the way that additional payments for families on low incomes are calculated by reference to tax credit finalised awards, the run-down period will be spread over a few more years yet.

Incapacity benefit

The previous Labour government had announced the abolition of Incapacity Benefit on a phased basis over three years from October 2010. The new administration has merely endorsed that strategy which will mean over 2 million people being medically assessed to establish whether they are capable of some work.

This will mean in practice many more people dropping off benefits altogether, going on to the largely means-tested employment and support allowance, or being placed on the much lower-paying jobseeker's allowance (together with an uncertain prospect of finding a job for those with limited work capabilities).

Those people moving off incapacity benefit who have been receiving it since April 1995 face the prospect of having their net income cut significantly due to the change in tax and tax credit status of the future payments that they will receive.

Disability living allowance (DLA)

From 2013 DLA will move to a medically assessed basis, undoubtedly with the intention of reducing the number of claimants.

Health in pregnancy grant

The £190 grant will cease from January 2011.

Winter fuel payment

Winter fuel payments (between £125 and £400) are paid to people reaching a qualifying age; this precise age has been complicated by starting the process of equalising the retirement ages for men and women (you will need to be born on or before 5 July 1950 to qualify for the coming winter). No change has been proposed to these payments.

Means-testing

In any system where benefits are granted by reference to income levels, savings can be made by lowering the income levels at which entitlement is diminished or stopped.

Tax credits taken away from higher earners

Tax credits were introduced by Labour on the principle of ‘progressive universalism’: some support for almost everyone; more support for those who need it most.

Accordingly, tax credits are in some cases payable to people on incomes in excess of £70,000 or £80,000, particularly large families with substantial childcare costs.

Substantial changes have been announced to the basic system of tax credits which will take a few hours to assess properly, although the general approach has been to help the poorest most. We will provide a separate analysis tomorrow.  But a summary of the changes are as follows:

• Families with household income above £40,000 (rather than £50,000) will start to have their family element tapered away from 6 April 2011 at a rate of 41% (not 6.67%);
• Also from 6 April 2011, households with income above the 'first income threshold' (£6,420 a year if you are on working tax credit and £16,190 a year if you claim only child tax credit) will have their benefit withdrawn by 41p for each £ over that amount, rather than 39p in the £ as at present.
• From 6 April 2012 the family element will be tapered away immediately after the child element.
• A number of elements will be removed, including the baby element (6 April 2011) and the age 50+ element (6 April 2012);
• The previously announced supplement for children aged one and two will be reversed from 6 April 2012;
• Backdating provisions will be limited to one month (previously 3 months or 93 days) with effect from 6 April 2012.  The one month rule will apply to both new claims and changes of circumstances.
• Reduce the income disregard for income rises from £25,000 to £10,000 for two years from 6 April 2011 and then to £5,000 from 6 April 2013.
• Introduction of an income disregard of £2,500 for income falls from 6 April 2012. This may mean that tax credits will not increase if income reduces within the new threshold, which could have a significant detrimental impact on the most vunerable.
• The previously announced decision on Working Tax Credits for the over 60s is confirmed.
• Consumer Price Index (CPI) will be used to uprate all of those elements of tax credits (previously uprated by RPI) from April 2011. The child element of the Child Tax Credit will increase by £150 above CPI in 2011-12 and £60 above CPI in 2012-13.

Housing benefit

Housing benefit will be targeted for significant cuts to the levels of support provided.

Sure Start maternity grant

From April 2011 the Sure Start maternity grant will only be available for the first child in a family.

National minimum wage

The new rates of national minimum wage, which will come into effect on 1 October 2010 will be:

£5.93 per hour for low paid workers aged 21 and over, increased from £5.80;

£4.92 per hour for 18-20 year olds, increased from £4.83; and

£3.64 per hour for 16-17 year olds, increased from £3.57.

For the first time there will also be an apprentice minimum wage of £2.50 per hour. The new rate will apply to those apprentices who are aged under 19, or 19 and over but in the first year of their apprenticeship.

It may be interesting to note that someone on a 35 hour week on the new adult minimum wage will be paid £10,792 per annum. This may then provide a pay ceiling for managers in the public sector of £215,840 per annum, if the proposals to limit pay to 20 times the lowest paid come into force.

Work incentives and free school meals

We regret the decision not to proceed with the free school meals (FSM) programme announced by the previous administration, once the current pilots have reported.

Sudden withdrawal of FSMs on entering work can act as a disincentive to coming off benefits.

We recommend that the work incentive effects of granting FSMs to children in low-earning households be evaluated as part of the current pilots.

Tightening HMRC's budget 

Public sector pay will be frozen for two years, except for those staff with incomes less than £21,000 who will receive flat increases of £250 each year.

We already knew that government departments would be under pressure to cut costs and today’s Budget confirms that HMRC, as with other government departments, will need to find significant further savings. But the coalition has promised to do so without impacting on frontline services.

 As outlined, for example, in our recent response to HMRC’s proposals to reduce face to face services much can be achieved by re-routing funds to voluntary sector organisations which help to plug the gaps, but such organisations need adequate additional funding. 

When will these things happen?

Midnight tonight

• Capital gains tax rate rises from 18% to 28% for higher rate taxpayers.

August 2010

• Child trust fund payments reduce for children born from that date.

September 2010

• New scheme for new businesses employing staff  in certain areas will get a substantial reduction in their employer National Insurance Contributions (NICs).     

October 2010

• National minimum wage increases, with new apprentice rate.   
• Support within a range of means-tested benefits for mortgage interest will reduce to an average mortgage rate.

January 2011

• Child trust fund payments stop
• VAT increase to 20% (no change to current zero/exempt rates)
• Rates of Insurance Premium Tax (IPT) will increase on 4 January 2011
• Levy on banks
• Health in pregnancy grant ceases.

April 2011

• Personal allowance increases to £7,475
• State pension increases realigned with earnings, prices or 2.5% whichever is the highest
• Family element of tax credit to be cut for families with income in excess of £40,000.
• Rate at which tax credits are progressively withdrawn above certain income levels to increase from 39% or 6.67% to 41%.
• Threshold at which employers start to pay NI will rise by £21 per week
• Lone parents with their youngest child over five will be moved onto Jobseeker's Allowance rather than Income Support.
• Housing benefit reforms
• Main rate of corporation tax starts to reduce as does small profits rate (together with capital allowance changes). 
• Consumer prices index to be used as the basis for calculating benefits and tax credits
• Default retirement age to be phased out.
• Sure Start maternity grant only available for first child.

April 2012

• Further changes to tax credits.

2013   

• Medical assessment for disability living allowance
• Further changes to tax credits.