The Chancellor delivered his Autumn Statement against a backdrop of the best economic outlook since 2010, but also continuing austerity for most people after years of welfare cuts.
09/12/2013, by Low Incomes Tax Reform Group, Tax Articles - General
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Background
The economic outlook is encouraging but austerity continues for the majority, whether in or out of work, following enduring cuts. Unemployment continues to fall, although for many temporary and agency workers the price they pay for being in work is zero-hours contracts, low pay and erosion of employment rights.
Winners and losers
There is support for small businesses in the cap on business rate rises and the discount for retail businesses occupying premises of rateable value below £50,000. Yet help for the lowest earners is limited to some protection from energy price rises, higher state pensions (paid for by longer working lives), a welcome extension of free school meals and continual increases in the levels of income at which people start to pay income tax. The ongoing reductions in welfare payments signalled by an entrenched cap on overall welfare payments (excluding the state pension) must be set against this.
Complexity
Meanwhile, the tax system becomes ever more complex and HMRC is being called upon to bring in more revenue while improving its service to taxpayers. To help it to do so, the departmental budget is to be protected from further reductions, but only to enable greater focus on tackling tax avoidance and evasion and not front-line staff where LITRG feels it is most needed.
Analysis
Here LITRG gives a short account of the main announcements affecting individuals and households on low incomes and analyses their likely effect.
Personal tax allowances – the facts
As LITRG has said many times in the past, increasing personal allowances is good for those paying basic rate tax and claiming either no welfare payments or only tax credits, but is less good for those on means-tested benefits, while those with annual earnings less than the current personal allowance receive no benefit at all.
The Autumn Statement says that the increase in the personal allowance since 2010 has saved the ‘typical basic rate taxpayer’ over £700 a year. But who is this typical basic rate taxpayer? In actual fact:
- Increasing the PA from £9,440 to £10,000 will be worth £112 a year to basic rate taxpayers. Increasing it further from £10,000 to £10,500 will be worth an additional £100 a year to basic rate taxpayers.
- Those who receive support only through tax credits will benefit from this whole £112 increase and the further £100 increase. This is because tax credits are calculated on income before tax is deducted.
- Those in receipt of current means-tested benefits, such as housing benefit, will see only £39.20 of the £112 increase and £35 of the further £100 increase. This reduced saving might be eroded still more if the taxpayer is also benefiting from a council tax reduction scheme.
- Those in receipt of universal credit will have the same problem because it is calculated on post-tax income. For example, Michelle is a lone parent claiming universal credit and working 25 hours a week. From April 2014 she will see her take-home pay rise by £112 a year, but she will also see her universal credit fall by £72.80. This will make her only £39.20 a year better off in comparison with other basic rate taxpayers not claiming universal credit (or claiming tax credits only) who will be £112 a year better off.
To help those on low incomes, the Government needs to recognise the interactions with means-tested benefits. Changes to universal credit could be made to ensure those receiving it see the full £112/£100 benefit.
National insurance contributions
Account should also be taken of national insurance contributions (NICs) paid by those in work. The primary earnings threshold, or the level of earnings at which people start to pay NICs, at £149 a week (or £7,755 a year) is considerably lower than the tax allowance. That will rise in 2014/15 to £153 a week, £7,956 a year.
The point on the income scale at which earners begin to build up an entitlement to contributory benefits, such as the state retirement pension, is lower still – at £109 weekly (£5,668 yearly) rising in 2014/15 to £111 weekly (£5,772 yearly). This is the lower earnings limit (LEL). Anyone earning between the LEL and the primary threshold builds up an entitlement to contributory benefits without having to make any contributions. So some people now earning between £109 and £111 whose pay does not rise next tax year could find themselves no longer building up a contributions record by virtue of their earnings.
The self-employed normally pay Class 2 NICs of £2.70 a week to build up a contributions record. That will rise in 2014/15 to £2.75. If they earn less than £5,725 a year (rising to £5,885 a year in 2014/15) from their self-employment, they are entitled to exemption from the Class 2 charge, although many will think it wise to continue to contribute in order to secure their benefits entitlement.
However, the removal of employer national insurance from April 2015, up to the UEL, for under 21s comes as a welcome financial incentive for those employing young people.
Free school meals
The announcement of an extension of free school meals to children in reception and years 1 and 2, and disadvantaged students in sixth form colleges, from September 2014 is very welcome.
As LITRG have previously said, unless support benefits such as free school meals are co-ordinated with mainstream welfare payments, such as tax credits and means-tested benefits, the interaction between the two can produce real disincentives to enter or remain in work. The immediate withdrawal of free school meals for the children of those entering work can result in the affected household being better off financially staying on benefits, even if getting a job means they become eligible for working tax credit. Extending the programme in this way will release those who now fall into that poverty trap.
Offshore intermediaries
LITRG welcomes the Government’s commitment to legislate so as to ensure that workers who are engaged by an offshore entity will nevertheless have an onshore ‘employer’ whom they can look to for employment rights, including statutory maternity pay, statutory sick pay and the like. The group particularly welcomes the fact that workers will be able to hold an onshore employer to account for both future and historic secondary NIC obligations, which give rise to such benefits for employees.
LITRG continues to look forward to a thorough, comprehensive review and simplification of the law to give better protection to temporary and agency workers, as the group has called for on previous occasions.
Collection of disputed tax
Consultation is to take place on a proposal to give tax authorities more powers to collect taxes even where they are in dispute.
HMRC already have the power to pursue individuals for payment where they think that tax credits have been overpaid to that individual, even where the amount remains in dispute. This can cause significant hardship.
LITRG would be very concerned if there was a more general right for HMRC to collect taxes in dispute. For a low income taxpayer this could be catastrophic on two fronts: first because the additional tax would be requested, but secondly because there could be associated reductions in that individual’s welfare benefits.
Tackling fraud and error in tax credits
To some extent LITRG welcomes HMRC’s continued commitment to reducing fraud and error in the tax credits system. However, the group is concerned that HMRC continue to focus on measures that tackle fraud, when in fact the greatest loss to government comes from error. HMRC also continue to conflate fraud and error and fail to identify official error, whereas in order to tackle fraud and error effectively it is essential to distinguish between fraud and the three main types of error: HMRC official error, claimant error and contributory error.
Some of the announcements are welcome: for example, measures designed to prevent overpayments arising, which can cause problems when claimants have to repay them at a later date. However, there needs to be a safeguard, to ensure that people who would be plunged into hardship as a result of this measure can continue to receive payments, particularly if the overpayment has been caused by HMRC error or incorrect advice.
LITRG is concerned that most of the measures are aimed at dealing with fraud; a greater loss to the Exchequer arises from error, and the best means of tackling this is by providing better information, communication and education. The majority of the measures announced in the Autumn Statement are aimed at dealing with fraud and error once it is in the system rather than stopping it entering the system in the first place. There is also a worrying failure to recognise that some error leads to underpayments of benefits and tax credits, and this issue needs to be tackled too, to ensure balance between HMRC and claimants.
LITRG is also concerned about the proposed increased use of private debt collection agencies. If this measure is to proceed, it is essential that the agencies apply the same standards as HMRC would and that their adherence to these standards is well-monitored. In particular people must be given a reasonable time to make a payment arrangement.
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