Wednesday, 6 April 2011

Happy New Year !

Hullo ma wee blog,

Today sees the start of a shiny new tax year. Happy 2011/12 everyone!

Unfortunately, for many UK taxpayers, the new tax year is far from happy, and instead brings an additional £200 tax bill, according to the Institute for Fiscal Studies (IFS). This may come as a surprise. After all, the Government is very proud of the fact that the personal allowance, the amount of income you can receive before paying any tax at all, is going up to £7,435. This will remove 500,000 taxpayers from income tax completely, according to IFS figures.

What they are perhaps less keen to mention is the fact that the simultaneous lowering of the 40% tax rate threshold down to £34,000 will actually make 750,000 more taxpayers liable to 40% tax. Unsurprisingly, the wealthiest will contribute the most to refilling the Treasury coffers, as their tax changes will be exacerbated by the restriction on pension contributions. But it is one earner families with children who will be worst affected, according to the report. It actually concludes that the main winners from these reforms are non-working lone parents, being the only household type to gain on average. It says low- to middle-income households without children will benefit. Amazingly, the reforms "will slightly weaken the incentive to work at all", according to the IFS.

Was this David Cameron's aim when he introduced the reforms? Presumably not…

But aren't changes normal at the start of a new tax year?

Yes, but the issue has been exacerbated this year because of the sheer number of different taxes and benefits affected. The biggest change, affecting the most people, will be the 1% increase in National Insurance Contributions, which is expected to bring in more than £9 billion on its own. The increase in the personal allowance is good news for lower earners, but higher earners will pay £1 billion more through the lowering of the basic rate band and the changes affecting higher rate tax relief on pension contributions. But the lowest paid do not escape scot free. By switching the method of inflation used to increase benefits from RPI to CPI (a lower measure), the Treasury is pocketing a cool £1.1 billion, and cutting the winter fuel allowance and certain other benefits by 1.5% brings in more than the same amount again. And it's worse if you have children. The health in pregnancy grant, the baby element of Child Tax Credit and Child Trust Fund are all scrapped, and the Sure Start Maternity grant restricted. Child Benefit is frozen, and will soon become means-tested, and the maximum amount of childcare costs covered by Child Tax Credit falls 10% to 70%.

Overall, the net payday for the Treasury (after adjusting for the reduction in corporation tax, effective from 1 April) amounts to £5.35 billion, which works out at approximately £200 for each and every UK household.

Obviously, not every household will suffer by this much, some will be better off. But a significant number will be worse off and given the substantial changes to benefits, it is likely to be those with children who are claiming benefits that are hit the hardest. Which seems a little harsh to me. What's worse, this £200 penalty is in addition to the effect of the VAT, fuel duty and other indirect tax increases in January this year, which will already cost the average household an extra £480 this year.

With salaries already eroded by inflation, this is not great news for the average pocket.

Unfortunately, most of these changes are going to be hard to avoid — with the exception of consumption taxes like VAT, fuel duty and alcohol/cigarette levies, there is very little action we can take to avoid being hit by the changes. An employee is not going to volunteer to take a pay cut just so he can pay less National Insurance, for example. Similarly, someone on benefits is at the whim of the Government if they decide to change those benefits currently in receipt. And, as the IFS concludes, the changes actually widen the benefit gap, making it less worthwhile financially for those claiming benefits to go and seek work.

The information above came from this article


Nicky said...

Ugh, these situations just blow my mind. I realise that politicians are (hopefully) "trying" to get some best-fit situation when they introduce new tax laws, but most of the time I end up wondering how on earth they arrived at their conclusions that such & such a law is going to be a good idea....Grrrrrrr!

Alistair said...

It's a game of give and take right enough - we give and they take. lol

I wonder how much more tax and less allowances MP's have this year compared to two or three years ago???

Want to place a bet?

lom said...

Hubby is classed as a middle earner, and we will be a worse off. I haven't worked for nearly three years ans can't get a job no matter what I try/do. I think because I am 50, would it be wrong not to fill in the DOB bit on the froms? haha

Alistair said...

I have the exact same problem myself. It's soul destroying.....

The Scudder said...

Politicians annoy me so much nowadays that I try to ignore all of their machinations.
I've come off 2nd. best on every tax change they've made in the last 50-years so I don't expect any change to that this year.
Cynic ? Moi ?

Alistair said...

Scudder - Oh Oui et Bienvenue a le Federation Nationale Du Cynique D'Ecosse.

Your registration documents are on their way!

Good to hear from you bud!


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