In his October 2018 Budget the Chancellor of the Exchequer announced that the income tax personal allowance would be increased from £11,850 to £12,500 and the higher rate threshold would go up from £46,350 to £50,000 in April 2019. The married Couples/civil partners transferable allowance goes up from £1190 to £1250.
The personal allowance will now be over 50% higher in real terms than it was in 2009/10 The cost of this, Paul Johnson of the IFS has said, comes to £25 billion: £15 billion if account is taken of the off-setting reductions in the higher rate threshold that have accompanied some of the increases in the personal allowance. Even with the raising of the higher rate threshold to £50,000 it will still be 9% lower in real terms than in 2009/10 which means that there will be 1.2 million more higher rate taxpayers than there would have been had the threshold risen in line with inflation.
The Government is increasing the Universal Credit work allowance by £1000 a year – what people can earn before they start to lose credits – some families will see the amount they have to live on increase by £630 a year. Owner-occupiers who do not get housing support will now be able to earn £5,908 before they start to lose Universal Credit. Those renting who get housing support will be able to earn £3,376. The present amounts are £4,908 and £2,376 respectively.
For families, the increase in the work allowance is more significant than the increase in the tax allowance. But, those claiming Universal Credit or Housing Benefit gain less from the tax allowance increase as this reduces their entitlement to these benefits. In his Budget Speech the Chancellor said that a basic rate taxpayer will be £130 a year better off as a result of the increase in the Personal Allowance. However a basic rate taxpayer who is also entitled to Universal Credit will be only £48 a year better off. Taken together, a Universal Credit claimant who is a basic rate taxpayer may be only £545 a year better off.
Increasing the work allowance pushes high marginal rates further up the income scale.
There is no increase in the tax credits work allowance – tax credit rates are being frozen which means that in real terms they are being cut. This is also true of Child Benefit –the child benefit rates remain unchanged. They are now 20% lower in real terms than they were in 2010 – the tax allowance is 55% higher. The child benefits were originally introduced as a replacement for child tax allowances. The restriction of tax credits for third subsequent children except for children born before April 2017 remains. There are also no changes to the High Income Child Benefit Charge.
This has been another lost opportunity to make the tax system fairer. The annual cost of increasing the tax allowance has now risen to an astonishing £25 billion – £15 billion if the off-setting reduction in the higher rate threshold is counted. These changes have mainly benefited better off households – they have not made the income tax system fairer.
There are calls from both ends of the political spectrum to make income tax fairer. The problem is that people will differ in what they think is fair. There isn’t a single concept of tax fairness – there are many. Perhaps the least controversial is to compare income tax liabilities with how well off people are. On its own an individual’s income is a poor guide. To know how well off people are we need to know something about their family circumstances. How many people the income has to support - is it the only income the household has and what are the household’s “inescapable outgoings”, its housing costs and perhaps its childcare costs?
For means tested benefits the Government looks at household income and takes account of the number of people in the household. This also is the way the statisticians have for many years measured income inequality. Income tax, however, is based almost entirely on individual income and takes no account of family size and responsibilities. It contributes to income inequality rather than reducing it.
There will be different views on the amount of tax the “rich” should be required to pay. Surely, however, many would agree that the “rich” should bear a bigger share of the income tax burden than the “poor”. Someone who is “rich” should not be paying the same tax as someone who is “poor”. This is what happens under our present income tax system.
Lord Lawson has told Tax and the Family that his approach had been that the tax system should be fair and that if you wanted to help someone this should be done through the social security system. This was why a fully transferable personal allowance had been an integral part of his proposals for independent taxation. The resources that have been used to increase the personal allowance could and, in our view, should have been used to bring income tax closer into line with household incomes and responsibilities - the income measure used in the social security system.
The income tax changes proposed for next year cost over £1 billion. Even if there was not be a radical change of direction There is a strong case for saying that some of this money should have been used at least to increase the threshold for the Child Benefit High Income Charge which starts to apply at £50,000. It is no longer a “high income charge”. Families living in rented accommodation in areas where rents are high can be earning £50,000 but living on incomes, which are below the poverty line when housing costs are taken into account. There can surely be no case for withdrawing Child Benefit from any family who may be in poverty. Also, some of this money could surely have been used to sort out the indefensible high marginal rates than can apply when income is between £50,000. and £60,000. In some cases the rate is over 100%.
It is now estimated that a third of all working age households are entitled to some Universal Benefit and thus caught in the marginal tax trap. Universal Credit, whatever its disadvantages, does bring down the high marginal rates which so many families face, but for those caught in this trap the marginal rate will still be 80% when council tax withdrawal is also taken into account. Policy makers and commentators alike seem remarkably complacent about the economic effect of so many families facing these high marginal rates. The problem starts with an income tax system that takes virtually no account of the family unit.