You just woke up £200 worse-off

Sam Thewlis
by Lovemoney Staff Sam Thewlis on 06 April 2011  |  Comments 16 comments

This week's changes to tax, national insurance and benefits will leave many worse-off, including single parent families, and reduce the incentive to work. Find out why and how the average person will be £200 worse off.

You just woke up £200 worse-off

This week sees the start of a shiny new tax year. Happy 2011/12 everyone! Unfortunately, for many UK taxpayers, the new tax year is far from happy, and instead brings an additional £200 tax bill, according to the Institute for Fiscal Studies (IFS).

This may come as a surprise. After all, the Government is very proud of the fact that the personal allowance, the amount of income you can receive before paying any tax at all, is going up to £7,435. This will remove 500,000 taxpayers from income tax completely, according to IFS figures.

What they are perhaps less keen to mention is the fact that the simultaneous lowering of the 40% tax rate threshold down to £34,000 will actually make 750,000 more taxpayers liable to 40% tax.

Unsurprisingly, the wealthiest will contribute the most to refilling the Treasury coffers, as their tax changes will be exacerbated by the restriction on pension contributions.

But it is one earner families with children who will be worst affected, according to report.

The report actually concludes that the main winners from these reforms are non-working lone parents, being the only household type to gain on average.

It says low- to middle-income households without children will benefit.

Amazingly, the reforms “will slightly weaken the incentive to work at all”, according to the IFS.

Was this David Cameron’s aim when he introduced the reforms? Presumably not…

Aren’t changes normal at the start of a new tax year?

Yes, but the issue has been exacerbated this year because of the sheer number of different taxes and benefits affected. The biggest change, affecting the most people, will be the 1% increase in National Insurance Contributions, which is expected to bring in over £9bn alone.

The increase in the personal allowance is good news for lower earners, but higher earners will pay £1bn more through the lowering of the basic rate band and the changes affecting higher rate tax relief on pension contributions.

But the lowest paid do not escape scot free. By switching the method of inflation used to increase benefits from RPI to CPI (a lower measure), the Treasury are pocketing a cool £1.1bn, and cutting the winter fuel allowance and certain other benefits by 1.5% brings in more than the same amount again.

And it’s worse if you have children. The health in pregnancy grant, the baby element of Child Tax Credit and Child Trust Fund are all scrapped, and the Sure Start Maternity grant restricted. Child Benefit is frozen, and will soon become means-tested, and the maximum amount of childcare costs covered by Child Tax Credit falls 10% to 70%.

Overall, the net payday for the Treasury (after adjusting for the reduction in corporation tax, effective from 1 April) amounts to £5.35 billion, which works out at approximately £200 for each and every UK household.

Obviously, not every household will suffer by this much, some will be better off. But a significant amount will be worse off and given the substantial changes to benefits, it is likely to be those with children who are claiming benefits that are hit the hardest. Which seems a little harsh to me.

What’s worse, this £200 penalty is in addition to the effect of the VAT, fuel duty and other indirect tax increases in January this year, which will already cost the average household  an extra £480 this year.

With salaries already eroded by inflation, this is not great news for the average pocket.

What can we do about it?

Unfortunately, most of these changes are going to be hard to avoid- with the exception of consumption taxes like VAT, fuel duty and alcohol/cigarette levies, there is very little action we can take to avoid being hit by the changes.

An employee is not going to volunteer to take a pay cut just so he can pay less National Insurance, for example.

Similarly, someone on benefits is at the whim of the Government if they decide to change those benefits currently in receipt. And, as the IFS concludes, the changes actually widen the benefit gap, making it less worthwhile financially for those claiming benefits to go and seek work.

However, if we are on the downside of the equation, we can maximize our tax-free allowances by investing in ISAs and for those who will be denied a Child Trust Fund, you could consider setting up a Junior ISA instead.

Tax efficient investment schemes, such as the Enterprise Investment Scheme (EIS) have been modified to allow greater amounts of tax relief, and pensions are still a tax-effective means of long-term investment for many people, whose contributions fall within the new, lower limits.

What do you think of the changes?

Let us know using the comments box below!

More: Find a competitive ISA | Government unveils Junior ISAs | Turn your kids into millionaires

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Comments (16)

  • nosbort
    Love rating 160
    nosbort said

    prashatt, if you think that the mess we are in is because of the bankers you are sadly deluded. The mess is of Gordon Brown's making for 'twas he who took 5.5 billion a year out of your pension fund and mine and set in train the disasters of house price increases by telling everyone that it didn't matter how much they paid for a house because mortgages were 'affordable'. He then spent every penny that the treasury had twice and borrowed so much money that, when all the cuts are finished, all that will have happened is that the debt will have stopped increasing. The deficit is just that, it is how much we are adding to the existing debt and once eliminated we still have to pay off the frightening pile of debt as well. Brown also hid masses of debt as 'PFI' which is the single most expensive way to borrow that ANY politician has ever come up with. Stop shouting at the bankers and remember who made this mess. BTW, before you even think it, NO I am not a banker, I run a small business.

    Report on 07 April 2011  |  Love thisLove  1 love
  • onthecomputer
    Love rating 78
    onthecomputer said

    I think all benefits should be cut and hopefully that might just lessen the burden on the poor tax payer. By all means if you lose your job through redundancy or ill health then of course these people should be helped temporarily. If you have a long term sickness yes help those - I for one am all for that - helping those who really need it but to help people just because they have children - ridiculous. Child benefit began to help families in post war Britain.. the war was over long ago - time to stop it all together now that would be very fair - don't have children if you cannot afford them!

    How about a bonus for people who NEVER have children when they come to retire????

    Report on 25 May 2011  |  Love thisLove  1 love

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