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LITRG welcomed the increase in personal allowance announced in the Autumn Statement, but noted that, when other reductions in benefits are factored in, savings for low-income households are much lower.

Introduction

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.

Example

For 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 whereas in 2013/14 they will pay £222.24;
• but the saving could be reduced by up to 85% because of their lower entitlement to housing benefit and council tax benefit.

Universal credit

Similarly, 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 fall in their universal credit entitlement.

The 40% income tax rate

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.