More people on low incomes pay less tax, but receive less benefits - LITRG Press Release

Published on 5 December 2012

The increase in personal allowance announced today is welcome, but the savings for low-income households are much lower when the corresponding reductions in means-tested benefits and universal credit are taken into account, say LITRG.

LITRG Technical Director, Robin Williamson, commented:

“The increase in personal allowance is welcome because fewer people on very low incomes will have to worry about taxation. But people on means-tested benefits whose benefit entitlement is based on after-tax income may not be very much better off overall.

“If their after-tax income goes up because they are paying less tax, their benefits may fall.”

For, say, a sole earner with a partner and a child and on earnings of £9,500 a year, this means:

  • in 2012/13 they were paying £507 in income tax and Class 1 national insurance (NI) contributions, in 2013/14 they will pay £222.24;
  • but the saving could be reduced by up to 85% because of the decrease in their entitlement to housing benefit and council tax benefit.

Robin Williamson added:

“When universal credit is introduced in October 2013, it will also be based on after-tax income, and as it takes over from tax credits it will apply much further up the income scale than today’s means-tested benefits. So families on low to middle incomes will continue to pay for any future increase in the personal tax threshold with a corresponding decrease in their universal credit entitlement.

“Meanwhile, in 2013/14 individuals will begin to pay income tax at the 40% rate when their income reaches £41,450, as compared with £42,475 in 2012/13, so the squeezed middle becomes even more squeezed next year before the Exchequer relaxes its grip in later years.”


(05-12-2012)

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