What can be done to ease the family tax burden?
Families often get overlooked when the hardships of the recession are discussed, but they are suffering under immense pressure as incomes are squeezed and what little benefits they receive from the government are cut.
Yet, they are the ones expected to produce most of the country's economic growth, pay the lion's share of taxes and raise the next generation of taxpayers.
Moneywise believes it is time the government turned its attention to easing the burden on families, to help them drag the country back into economic prosperity.
In January, we launched our Defending the British Family campaign. So far, we've looked at how families are coping with the rising costs of childcare and the problems of funding a good education for our children.
This month, the focus is on the tax burden facing families and what can be done to ease it.
CARRYING THE TAX CAN
Research from the Taxpayers' Alliance shows that the average family pays £656,000 in tax over a lifetime. "Households in the UK now pay an incredible amount in tax, handing over a hefty slice of their income," says Matthew Sinclair, director of the Taxpayers' Alliance.
According to the think tank's figures, the average family earns £36,372 a year but pays £9,083 back to the state in direct taxes, including income tax and national insurance contributions, plus a further £5,393 in indirect taxes, such as VAT, which is added to the price of many everyday essentials. That's £14,476 in tax every year - 40% of a family's gross income.
To add to the misery, real wages fell by 4.2% last year, according to think tank Resolution Foundation, which lobbies to improve the financial situation for low to middle-income families. It calculates that even if income growth returns to the levels seen during the boom years of the 1990s and 2000s, it would take until 2020 for families to see their disposable income return to what it was before the recession.
And what do these families get in return for their enormous tax contributions? A VAT rise in January 2011, cuts to benefits and public sector redundancies. It's hardly surprising so many people are disgruntled with the coalition. "The VAT hike has added to the cost of living and many taxpayers are really feeling the pinch with little prospect of improvement on the horizon," says Sinclair.
"The Chancellor needs to deliver a tax cut in the Budget (21 March) to ease the burden and help the economy to grow. Simpler, fairer taxes can decrease the lifetime tax bill for households and leave everyone with more of their own money, so they can decide how to spend it."
The government isn't completely unaware of the plight facing many families. Council tax has been frozen for two years, although 15 councils are threatening to defy the government's call to freeze the duty, and child tax credits will increase by 5.2% in April.
"I do appreciate that it is a hard time for families, with household finances being stretched," says Margot James, MP for Stourbridge. "Many families are facing rising fuel costs and action taken by this government will mean that petrol duty is 10p lower than it would have been, helping to save £144 on filling up the average family car by the end of the year."
The lifetime cost of taxes for a family
Income tax - £250,000
VAT - £101,080
National Insurance contributions - £90,535
Council tax - £64,045
Source: The taxpayers' Alliance, 30 January 2012
But these moves are simply not enough to make a serious difference to the tax burden facing UK families. Chancellor George Osborne needs to deliver significant tax reforms to help those families whose ability to thrive is directly connected to the country's economy.
One policy that could make a big difference is the Liberal Democrats' election promise to raise the personal income tax allowance to £10,000. This is one proposal the Lib Dems have managed to protect from coalition compromises, with plans for the rise to come in by 2015. At present, we can all earn £7,475 a year before we become liable for income tax. If that was increased to £10,000 it would save the average family with two earners £1,010 a year.
Osborne is due to announce how much the personal allowance will rise in the 2013/14 tax year in this month's Budget. It's not yet known what the rise will be but he's facing pressure from within government for a big bump.
THE EXTRA MILE
A rise in the personal allowance will be good news for most families but we want the government to go a step further. If the allowance was made transferable between married couples and civil partners, it would significantly ease the tax burden on families that have a stay-at-home parent.
Given this year's allowance, a household's main breadwinner would be able to earn up to £14,950 before paying income tax, meaning the stay-at-home parent's contribution to the economy would be recognised, as their personal allowance would not go to waste.
This would be particularly good news given the huge financial burden childcare puts on families, preventing many parents from returning to full-time work. If you are forced to stay at home and care for your children, you shouldn't be punished by losing your personal allowance.
"A transferable personal allowance for income tax purposes would be a great help for lower and middleincome couples," says Ian Miles, a partner at James Cowper accountants. But it would need to be carefully managed so it wasn't used by higher-rate taxpayers for tax avoidance. "The question to answer would then be the point at which the ability to transfer the allowance is removed. And, of course, whether or not the government can afford it."
Another way the government could significantly ease the tax burden on families would be by reducing VAT. There was a 2.5% VAT hike in January 2011, taking it to 20% just as people were already struggling with household bills. With inflation running at 3.6% (consumer prices index) and many bills rising even faster a VAT cut would immediately benefi t families and cut the cost of the weekly shop. The opposition cut VAT to 15% when it was in offi ce and says there is a big argument for it to be cut again.
"A cut in VAT will put much-needed cash directly into the pockets of those who are struggling up and down the country," says Cathy Jamieson, MP and shadow economic secretary to the Treasury. "The Treasury's own figures show a cutback to 17.5% would be worth an average of £459 per year for a family with children, meaning people can spend more and help kick-start the economy."
Finally, the government should make the tax system simpler. "The UK tax system is unclear and overly complicated: it now has one of the longest tax codes in the world," says Robert Oxley, campaign manager at the Taxpayers' Alliance. "Making tax more transparent would go a long way to ease the burden on taxpayers."
One way to simplify things would be to combine income tax and national insurance. "These two taxes on income go into the same pot yet are charged separately.
Combining them would go a long way to making it clear how much everyone pays," says Oxley. Osborne stated in his Budget last year the two taxes should be merged in "a historic step" to simplify tax, but he hasn't yet given any details when a merger's likely – if ever – to happen.
The move is seen as an ‘election loser' in political circles as it will make it clear to taxpayers that they pay at least 32% in income tax once national insurance is factored in, which most people don't realise at present. Whether it's a rise in the personal allowance, a tax cut, a simplification of the tax rules or, ideally, all three, the government needs to do something to ease the tax burden facing the nation's struggling families.
Otherwise, the very people who are meant to support the British economy could collapse under the weight and become an additional burden to the state.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).