Budget for those on low and middle incomes?

Published on 21 March 2012

Today the Chancellor said that he was delivering a Budget for those on low and middle incomes. Did he succeed? For those on the lowest incomes the answer must be “no”, for those on lower middle incomes the answer is “perhaps”.

The Budget is only part of the picture for those on the lowest incomes. Tax rates are of little interest to those that do not pay tax because their incomes are too low. And when a person's income rises above the personal allowance, it is important to look at the interaction of tax and benefits (such as housing benefit and council tax benefit) to get an overall picture of whether they are better or worse off as a result of tax changes.

Tax credits play an enormous role in the lives of those with low paid jobs or those with children and we have already analysed the changes that are due to come in from 6 April. Most of these changes take money out of the purse or wallet of those on low incomes and this has to be balanced against the tax changes announced today. One further positive change confirmed today is an exception for those entitled to carers allowance from the requirement for certain couples to work at least 24 hours from April.

For pensioners, the increase in the State pension (5.2% from April taking a full single pension to £107.45 per week) has to be balanced against the far less generous increase in the higher personal allowances for those aged 65 and over as compared to the increase in the basic personal allowance. This is now shown to be the strategy for removing the advantageous tax system for pensioners altogether in the next couple of years. Simplification will happen, but this will mainly be in the longer term and at a cost to pensioners.

Main changes affecting those on low incomes announced today

The headlines from today affecting those on low incomes are:

  • the personal allowance which rises to £8,105 from 6 April will now be raised to £9,205 in April 2013 on its way to £10,000 before the end of this Parliament;
  • the age allowance for pensioners aged 65-74 will rise to £10,500 (from £9,940) and for those 75 and over will be £10,660 (from £10,090) and that is where it will stay. But from April 2013, no-one born after 5 April 1948 will get an age allowance - they will stay on the basic personal allowance. And the higher rate for those aged 75 and over will be only for those born before 6 April 1938. Alongside the married couple’s allowance (to which entitlement is limited to couples one of whom was born before 6 April 1935), we will now have a confusing array of age-related allowances fixed by date of birth. We are not sure this is the solution the Office of Tax Simplification might have envisaged when they noted in their recent report that age allowances are an area of complexity for pensioners. We will be writing further on this topic over the next week;
  • fuel duty remains static;
  • the“sin” taxes of wine and tobacco move sharply upwards.

In conclusion, nothing much happens immediately, but in a year’s time some significant change.

Particular implications of the announced changes

For people who are not taxpayers

For people who are about to be taken out of tax by the increase in the personal allowance, you should:

  • go to your bank or building society and fill in form R85 so that you now get your interest paid to you without deduction of tax;
  • be aware that your Gift Aid payments will now not benefit the charities to which you are giving as it is only taxpayers who can “give the benefit of their tax” to a charity or sports club.

For taxpayers on low incomes

For people who are on low incomes, struggling around National Minimum Wage levels, you should be aware that although your personal allowance may go up by £630 from 6 April saving you £126 in tax each year, if you are receiving housing benefit and council tax benefit then you may, on the other hand, be out of pocket by up to £107 - ie, saving only £19 a year overall.

This is because both of these benefits are based on income after tax and national insurance have been deducted, so increasing the personal allowance can actually result in an increase in your income for housing benefit and council tax benefit purposes. Not only that if, for example, your housing benefit is stopped because of your increase in net income, then you can lose other entitlements, such as advantageous fuel tariffs and other so-called “passported benefits” (see our article).

Disappointments

We are disappointed that the Chancellor did not take the opportunity to:

  • change direction on the child benefit withdrawal proposals, not because it will affect those who we seek to represent, but because it is an unfortunate precedent in trying to marry a weekly benefit system with an annual tax regime. Although some of our previous concerns have been addressed, some remain. The result we can confidently predict will be chaotic. We expressed our views on this some time ago;
  • raise the level of the rent a room relief from £4,250 a year. This relief has remained unchanged since 1997-98. In the past it has served to increase the supply of private residential accommodation and a recent survey has shown that many homeowners with a spare room to rent out are currently doing so to help make ends meet in the present economic climate. This tax free source of income can also be valuable in helping first time buyers in meeting mortgage criteria, and as we have previously indicated this relief can be a useful additional source of tax-free income for foster carers who continue to ‘foster’ a person after the age of 18 but receive no further allowances other than ‘supported lodgings’ or ‘shared lives’ payments;
  • provide adequate funding to the voluntary sector to compensate for the intended withdrawal of Legal Aid so that vulnerable people can obtain appropriate support to challenge decisions made by government departments. The announced extra funding of £20 million for the next two years will not go nearly far enough.

Future developments

Further work on various areas of potential improvement to the tax system was also announced today, including:

  • Developing a ‘personal tax statement’ for individuals, attempting to help people understand how the tax they are paying is worked out and where it goes - awelcomeconcept in theory, but its success very much dependent on how it is delivered;
  • Considering the alignment of how income tax and national insurance contributions are administered - something which could make the system overall easier for people to understand, but could have pitfalls for some low-income workers with multiple part time employments depending on how it is taken forward. We are pleased to note that self-employed contributions will also be considered as part of the promised consultation, as it earlier appeared the project would concentrate on employee contributions;
  • The introduction of a new Statutory Residence Test from April 2013 for UK tax purposes which, if well-designed, could simplify matters for migrants to and from the UK;
  • From April 2013, small businesses with turnover of less than £77,000 a year will be able to use a simplified "cash accounting" basis to work out their taxable profit. This means that they will be able to calculate their taxable income by adding up business receipts, and subtracting payments made to cover allowable expenses. They will be able to use this scheme as their business grows to £150,000 turnover. A consultation will be launched shortly and will include a look at disincorporation - something that businesses falling in to the limits above may wish to do as they get bogged down in the complexities of Corporation Tax rules and operating as a company.

(21-03-2012)

Contact: Kelly Sizer (please use form at http://www.litrg.org.uk/ContactUs)