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CIOT: More people on low incomes pay less tax, but receive less benefits

CIOT: More people on low incomes pay less tax, but receive less benefits

The increase in personal allowance announced today is welcome, but the savings for low-income households are much lower when the corresponding reductions in means-tested benefits and universal credit are taken into account, say the Low Incomes Tax Reform Group (LITRG).

LITRG Technical Director, Robin Williamson, commented:

“The increase in personal allowance is welcome because fewer people on very low incomes will have to worry about taxation. But people on means-tested benefits whose benefit entitlement is based on after-tax income may not be very much better off overall.

“If their after-tax income goes up because they are paying less tax, their benefits may fall.”

For, say, a sole earner with a partner and a child and on earnings of £9,500 a year, this means:
in 2012/13 they were paying £507 in income tax and Class 1 national insurance (NI) contributions, in 2013/14 they will pay £222.24;
but the saving could be reduced by up to 85% because of the decrease in their entitlement to housing benefit and council tax benefit.

Robin Williamson added:

“When universal credit is introduced in October 2013, it will also be based on after-tax income, and as it takes over from tax credits it will apply much further up the income scale than today’s means-tested benefits. So families on low to middle incomes will continue to pay for any future increase in the personal tax threshold with a corresponding decrease in their universal credit entitlement.

“Meanwhile, in 2013/14 individuals will begin to pay income tax at the 40% rate when their income reaches £41,450, as compared with £42,475 in 2012/13, so the squeezed middle becomes even more squeezed next year before the Exchequer relaxes its grip in later years.”

Notes to editors

The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation (CIOT) 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.

The CIOT is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities. The CIOT’s 16,500 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’.

George Crozier
External Relations Manager

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The Chartered Institute of Taxation
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The Association of Taxation Technicians
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www.att.org.uk

Low Incomes Tax Reform Group – an initiative of the Chartered Institute of Taxation
www.att.org.uk

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