Tax change set to hurt 18 million families

21 May 2008

Millions of families will find themselves worse off in two years' time if the government fails to extend last week’s one-off income tax cut, a new report has warned.

The study, by the Institute of Fiscal Studies (IFS), claims that once the £600 increase in personal allowances for basic rate taxpayers concession ends in 2009, 18 million families will find themselves worse off by £150 a year.

The report says that six million people will pay more income tax this year as a result of the abolition of the 10p rate, while 0.9 million families are worse off as a result of last year's Budget, many of whom have an average income - after taxes and benefits - of just £11,800.

And despite the increase in personal allowances creating millions of winners in the short-term, the IFS says 18 million families will be worse off in 2010/11 if the concession is reversed. In contrast, only 3.6 million families will gain and 10 million will be unaffected.

The report also notes that the disappearance of winter fuel payments will contribute to many people’s shrinking finances.

The report warns: “In the absence of further policy changes, the next two years would see many families made worse off as the ‘one-off’ income tax cut and this year’s higher winter fuel payments disappear, and as the upper earnings limit for National Insurance contributions rises.”

And reversing the increase in the personal allowance would mean that 5.4 million families would not have been compensated in a lasting way for the abolition of the 10% band, according to the report.

The IFS says chancellor Alistair Darling’s next move is unclear. Although he has stated that the government aims to “continue the same level of support for those on lower incomes”, the IFS estimates that retaining the higher personal allowance would cost an extra £2.7 billion a year, while keeping the winter fuel payment at its winter 2008 level would require another £575 million a year.

Robert Chote, director of the IFS, says: “By announcing a big ‘one-off’ increase in the personal income tax allowance, Alistair Darling has not only created millions of winners this year; he has created millions of potential losers next year.

“On the evidence of its recent decisions, the government may well be afraid to take their gains away from them. If public sector borrowing ends up permanently higher as a result, it will further undermine the credibility of the government’s management of the public finances and increase the probability of future tax increases or spending cuts – perhaps soon after the next general election.”

Was Alistair Darling right to increase personal allowances to compensate those hit by the 10p tax rate abolition? Vote now in our poll.

Add new comment