Pre-Budget report makes low income-people a priority

Published on 24 November 2008

In the most complex Pre-Budget report so far, the Chancellor has concentrated many of his proposals on those in the UK who are amongst the most disadvantaged. This approach is welcome; whether his measures will have the effects he anticipates is yet to be seen.

The Chancellor today announced the widely trailed changes to the VAT rate bringing down the standard rate from 17.5% to 15% for 13 months from 1 December 2008. He also made some bold moves in tax and NIC thresholds, rates and allowances, some to take effect in the future. Finally, he foreshadowed some changes to the child benefit, tax credits and pension credit regimes which will benefit a range of low-income households.

In the rest of this article we will concentrate only on the likely effects for those on low incomes.

There are a couple of general points to make before we move to the individual policy changes.

Many people on low incomes are in debt. The best financial strategy for such people is to repay that debt.

Many people on the lowest incomes are not taxpayers and have the smallest budgets; so tax breaks in direct taxes are generally not for them.

VAT

The standard VAT rate was reduced from 17.5% to 15% for 13 months from 1 December 2008. This is helpful in reducing prices, provided the benefits are passed on. But the impact is least amongst the poorest in the community because of the regressive nature of VAT – the more a person spends, the more they benefit from the fall in the standard rate. Those whose highest proportionate spend is on food or children’s clothing on which where there is no VAT, or on domestic fuel where there is no change in the 5% VAT rate, may benefit not at all from the change.

Depending upon the individual spend (and this will vary enormously from older pensioners to the young unemployed) the savings may be worth a couple of pounds a week.

Despite campaigning from LITRG and others supporting people with disabilities, no targeted VAT reliefs were announced for this deserving and hard-pressed group.

The remaining 10% losers

When the additional £600 personal allowance was announced in May 2008 to compensate those who lost out from the abolition of the 10% band of tax, there were still some 1.1 million losers.

These were people whose incomes were not high enough to give them the full compensating relief; for example, someone on £8,000 a year still lost £1 a week in extra tax.

The Chancellor’s proposals include an increase in personal allowances from next April but nothing specific in the current year. However, next April’s increase will ensure that this year’s losers will pay less tax in 2009/10 than they did even in 2007/08. The person on £8,000 a year will then pay about £1.69 less in tax per week than in the current year, and just over 70p a week less than in 2007-08.

Tax allowances and rates from next April

The Chancellor announced the personal allowance levels from April next year:

 

Allowances

Current year

Next year

Personal

   

Up to 64

£6,035

£6,475

65 to 74

9,030

9,490

75 and over

9,180

9,640

Married couple’s

   

Aged 75 and over

6,625

6,965

Blind Person’s

1,800

1,890

 

The continuing increase in personal allowances is to be welcomed and is over the inflation rate for the allowance given to those under 65. This will help recompense those who lost out in the 10% furore.

National insurance contributions

The Chancellor announced a future adjustment (2011/12) to the National Insurance threshold so as to bring it in line with the starting rate for income tax. This was taken out of alignment when he raised the personal allowance threshold by £600 in May; but did not do the same for national insurance purposes.

This will restore the link between paying tax and national insurance and will make understanding easier for those on low incomes. This was one of our recommendations.

But the Chancellor combined this alignment with a 0.5% increase in national insurance contributions with effect from April 2011.

Trust rates – a blow to users of trusts for the vulnerable

For many years, LITRG has been campaigning to extend the categories of disabled and vulnerable trust beneficiaries eligible for favourable tax treatment. As the PBR foreshadows a significant increase in the trust tax rate (in line with the highest earners) from April 2011, we urge the Government to agree to review the impact of those prospective changes on all disabled users of trusts, particularly those who do not fit within the narrow statutory definitions.

Tax Credits

The Chancellor announced earlier than usual his proposals for tax credits rates for next year (2009/10). The increases were greater than expected and are set out below:

 

Working Tax Credit

 

Rates and Thresholds

Current year

Next year

Basic element

£1,800

£1890

Couple and lone parent element

£1,770

£1860

30 hour element

£735

£775

Disabled worker element

£2,405

£2530

Severe disability element

£1,020

£1075

50 Return to work payment (16-29 hours)

£1,235

£1300

50 Return to work payment (30 hours)

£1,840

£1935

 

 

Childcare element of the Working Tax Credit

Rates and Thresholds

Current year

Next year

Maximum eligible cost for one child

£175 per week

£175 per week

Maximum eligible cost for two or more children

£300 per week

£300 per week

Percentage of eligible costs covered

80%

80%

 

 

Child Tax Credit

Rates and Thresholds

Current year

Next year

Child Tax Credit Family element

£545

£545

Family element, baby addition

£545

£545

Child element

£2,085

£2,235

Disabled child element

£2,540

£2,670

Severely disabled child element

£1,020

£1,075

 

 

Income thresholds and withdrawal rates

Rates and Thresholds

Current year

Next year

First income threshold

£6,420

£6,420

First withdrawal rate (per cent)

39%

39%

Second income threshold

£50,000

£50,000

Second withdrawal rate (per cent)

6.67%

6.67%

First threshold for those entitled to Child Tax Credit only

£15,575

£16,040

Income disregard

£25,000

£25,000

 

 

Child Benefit - £ per week

Rates

Current year to December

From January 2009

Eldest/Only Child

£18.80

£20

Other Children

£12.55

£13.20

 

These changes will be welcomed by families on low incomes with children; but it does not appear that couples without children, which are a growing group in poverty, have been significantly helped by the changes announced.

Take-up of tax credits is higher than for any previous system of income-related support, with 82 per cent of eligible families claiming what they are entitled to, rising to 96 per cent for those on the lowest incomes. All we have to do now is to get the administration to work as it should.

We hope the forthcoming child poverty bill will co-ordinate the Government’s anti-poverty drive so that all parts of Government work together towards the same aim, and measures taken in one part of the tax and benefits system do not counter initiatives taken elsewhere. A cross-government body or department is needed to oversee this task.

Taxpayer’s Charter

The introduction of a new Taxpayer’s Charter is another welcome announcement from the Chancellor, and particularly gratifying that it is to be given statutory backing in the Finance Bill 2009.

The case for a statutory basis for the Charter has been made by most of those who consulted on the draft version earlier this year.

In addition the Charter will be kept simple, but be linked to new service standards and complaints procedures.

It seems as if most, if not all, of LITRG’s recommendations are going to be adopted.

More help for agencies advising on debt

A further £15 million is being made available to give more debt advice, mainly in partnership with the third sector.

State Pension, Pension Credit and Additional Payments

Pensioners will see the basic State Pension rise in line with prices by £4.55 per week to £95.25 per week as from next April.

For low-income pensioners in receipt of guarantee pension credit, a more generous above-inflation increase means that single pensioners will receive a minimum of £130 per week, with couples receiving a minimum of £198.45.

There was much speculation that the Chancellor would increase the Winter Fuel payment. But instead all pensioners and a number of recipients of disability benefits are to receive a one-off payment in January 2009 of £60 each (£120 for couples).

State benefits

There is no indication that the levels of the main welfare benefits are to rise significantly more than expected. The current Income Support amount of £60.50 for an individual is hardly enough for an individual to live on for a week.

However, those in receipt of certain benefits who receive an annual Christmas bonus will receive the one off payment of £60 in January 2009.

Savings Gateway

The Government announced that their Savings Gateway contribution will be at 50p for every £ saved. For more information on this new scheme go to our earlier article.

Students

A new PAYE regime for students is proposed for 2011 onwards. This was among our recent recommendations.

A final worry

There are set to be major additional efficiency savings. This often translates into more job cuts. Many of HMRC and DWP problems are due to inadequate staffing and often it is the most vulnerable of their customers who suffer most. Jobcentre Plus is due to receive extra funding, but a lot of these changes will put pressure on HMRC.

(24-11-2008)

Contact: John Andrews (Tel: 0844 579 6700 Fax: 0844 579 6701)