Personal allowance increase welcome for higher earners but of no benefit to those on the lowest incomes

Personal allowance increase welcome for higher earners but of no benefit to those on the lowest incomes

The Chancellor has announced today in the Budget that having gone up to £11,000 in the tax year beginning 6 April 2016, the personal allowance will rise again to £11,500 in 2017/18. The marriage allowance will increase commensurately to £1,150 in 2017/18.

Anthony Thomas, Chairman of the LITRG, has commented on the further increases to the income tax personal allowance announced today.

“Millions of working people will welcome this announcement, which will put more cash in their pockets, but those on the lowest incomes will not gain from it. If the Government want to improve work incentives for those on the lowest incomes too they should increase the work allowance in universal credit and the first income threshold in working tax credit.”

Anthony Thomas explained:

“One justification for increasing the personal allowance often given is that taking the lowest paid out of tax improves work incentives. It is important, therefore, to be clear about how increasing the personal allowance affects those on low incomes.

“Any increase in the personal allowance will not benefit the lowest paid at all. If the personal allowance is already £11,000, and it goes up to £11,500 by 2017/18, those earning under £11,000 a year will gain nothing. That includes all those who have earned the national minimum wage for 30 hours a week over the last year.

“For those with slightly more income, the picture is mixed depending on whether they receive tax credits or means tested benefits. Because entitlement to tax credits is assessed on pre-tax income, tax credit claimants on incomes above £11,500 a year should receive the full benefit of any future increases in the personal allowance. But because universal credit, like other means-tested benefits, is assessed on after-tax income, claimants will see a reduction in their universal credit equivalent to the cut in their tax bill. The net result is that they will receive only 35% of the benefit of any increase in the personal allowance.”

On work incentives for those on lower incomes, Anthony had this to say:

“If the Government want to improve work incentives for those on the lowest incomes too they should increase the work allowance in universal credit and the first income threshold in working tax credit. The work allowance in universal credit is the amount a claimant can earn before their benefit starts to be progressively withdrawn. The first income threshold fulfils a similar function in tax credits. At present both are frozen year-on-year, but increasing them would help those on the lowest incomes who see no benefit from any increase in the personal allowance.

“Another useful reform would be to increase the level at which individuals start to pay National Insurance contributions (NIC) in line with the income tax personal allowance. At present the two are out of step and the NIC primary earnings threshold lags well behind the personal allowance. If this could be done without sacrificing the right of the very lowest paid to a NIC credit, it would enable workers on low incomes to build up a contributory record at lower cost than at present. ”

Notes for editors

Low Incomes Tax Reform Group

The 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 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. The CIOT’s 17,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.