31/01/2011

Rich To Lose Most From New Measures In April

As the governor of the Bank of England predicts stagnant real earnings for some time to come, households will be hit by a further average £200 a year loss from tax increases and benefit cuts due in April.

In addition there will be big changes in marginal tax rates for some. Around 750,000 more people will become higher rate taxpayers as a result of a reduction in the level of income at which the higher rate starts to bite. This reduction accompanies the increase of £1,000 in the tax allowance which itself will take 500,000 other people out of tax altogether.

These are among the findings of new analysis done at the Institute of Fiscal Studies IFS in preparation for the launch of the annual IFS Green Budget on Wednesday February 2.

Losses from new measures in April will hit higher income households hardest.

They will lose from the NI increase, will not gain from the increased income tax allowance and a minority will lose from the restriction in the amount that can be contributed tax free to a pension. The richest tenth will on average lose 3% of their net income from changes in April compared with an average 1% for the population as a whole. Those with the highest incomes have already been hit by the new 50p rate on incomes above £150,000 and the loss of the personal tax allowance for all those with incomes over £100,000.

At the other end of the spectrum those dependent on means-tested benefits will be hit by the decision to raise benefits in line with the Consumer Prices Index (3.1%) as against the higher Retail Prices Index or Rossi Index (4.6% and 4.8% respectively).

In addition to a complex pattern of winners and losers there will be some big changes in the marginal tax (and tax credit withdrawal) rates faced by many.

An extra 750,000 higher rate taxpayers will be created. One little noticed reform will also see up to 175,000 working age individuals, with an annual income around £40,000, facing an increase in their effective marginal tax from just over 30% to more than 70%. This is caused by a reduction in the income at which the family element of child tax credit starts to be withdrawn, and a very sharp increase in the rate at which it is withdrawn.

(BMcN/GK)

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