Personal allowance tax increase not a gain for low earners or many women
Despite ongoing pressures on the public finances the current government has steadily increased the income tax personal allowance. It is shortly due to be increased to £10,000 on 6th April 2014. This policy initiative is being delivered at a considerable financial cost to the Chancellor. The TUC are concerned that this policy is ill-targeted and remains to be convinced.
The government’s argument is that this policy helps people on low and middle incomes, and some people have been lifted out of paying income tax as a result of the increases since 2010.
The government said in the December Autumn Statement:
a typical basic rate taxpayer will pay £705 less income tax per year in cash terms than they would have in 2010-11, leaving them over £500 per year better off than under pre-2010 plans.
It went on to state:
by April 2014, 2.7 million low income individuals will have been lifted out of income tax altogether since 2010, and 25.4 million individuals will have benefited from the increases in the income tax-free threshold.
However, while these assertions maybe true, they do not take account of the distributional impacts on households, and research from the IFS shows that families in the middle to upper household income deciles benefit disproportionately from this policy.
Effective income tax rates by income level over time:
The TUC are also concerned that working people on the lowest incomes will not gain from the coming increase, as they earn less than the £10,000 income tax personal allowance. This affects women in particular.
ONS ASHE data shows that one in four women workers earn less than £10,000. It also shows that 1 in 6 UK workers do not earn enough to benefit from April’s increase in the personal allowance. That’s four million employees.
Percentage of employees earning less than the tax threshold
The TUC welcomes the Low Pay Commission’s recent recommendation that the National Minimum Wage should rise 3 per cent to £6.50. However, this is only a starting point. We also think it is important that the government’s tax policy recognises the interaction between the NMW and the level of the personal allowance. As most NMW workers are part-time, even with a 3 per cent uplift in the NMW rate most NMW workers will not gain from the personal allowance as they earn too little to pay income tax. Interestingly, the government’s own evidence to the Low Pay Commission this year made this point.
In sum, the high cost of this policy change does not bring the much discussed advantages for many people on the lowest incomes.
What’s worse is that, as our report shows, this year those in the 40% tax bracket will receive a higher tax cut from the personal allowance rise than those on low pay. That’s because the higher rate threshold has now been adjusted to offset the personal allowance rise. And once Universal Credit is delivered things will become even worse, as for every £ of benefit that UC claimants receive from higher personal allowance rates 65p will be removed from their UC award.
This expensive and badly targeted policy is failing to deliver for low earners. If the government really wants to boost living standards for average families it should go back to the drawing board.