Responding to the Chancellor’s Budget announcement on the rise in the personal tax allowance, the Low Incomes Tax Reform Group (LITRG) generally welcomes the increase but points out that those on low incomes will benefit less than higher-rate taxpayers.
In particular, Universal Credit claimants will see only a small fraction of any tax saving due to the interaction of benefit and tax rules.
Today the Chancellor announced that the personal tax allowance would be raised from £10,000 in 2014/15 to £10,500 in 2015/16.
LITRG Technical Director Robin Williamson commented saying:
“Any lifting of the tax burden from the lower paid is to be welcomed. However, if the objective is to improve the financial position of low-income households, increasing the income tax personal allowance is not the most efficient way of doing that, particularly while the NIC primary threshold remains at £7956.
“In general, higher rate taxpayers stand to gain more from any rise in the personal allowance than basic rate taxpayers, while non-taxpayers gain not at all.
“The position of low-income taxpayers who also claim benefits is complicated. To anyone on most means-tested benefits, any tax saving from the raising of the tax threshold will be offset by a diminution in their entitlement to benefit. This is because means-tested benefits are based on net, after-tax, income – accordingly any reduction in the tax bill results in an increase in net income, hence the reduction in benefit entitlement.
“To illustrate, an increase in the personal allowance by, say, £1,000 will mean a 20% tax saving for a basic rate taxpayer - £200. But if that taxpayer is claiming universal credit, their entitlement will be reduced by 65p for every £1 increase in their net income. So the actual saving for a taxpayer in this position will be not £200, but 35% of £200, or £70.
“But where the basic rate taxpayer claims tax credits instead of universal credit, they will benefit from the whole saving of £200, because tax credits entitlement is based on gross, before-tax, income, not net.”
Notes to editors:
1. The Low Incomes Tax Reform Group (LITRG)
LITRG is an initiative of the Chartered Institute of Taxation to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
2. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 17,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.More Articles by Chartered Institute of Taxation (CIOT) ...