View the article online at http://citywire.co.uk/money/article/a572011
We don't need to tax low income families
There is a sound case, both economically and morally, for taking low income families out of taxation altogether by raising personal tax allowances.
While the politicians bicker over whether we can afford tax cuts, the moral case for increasing personal tax allowances to £10,000 sooner rather than later is overwhelming. There is no doubt whatsoever that low income families are feeling the squeeze.
A survey by charity, Family Action, highlights the enormous pressure on family finances with some families having less than £2 per person a day to spend on food. The high and rising cost of fuel and food is hitting families very hard.Family Action reports that families are facing an unprecedented squeeze on their finances leaving many with little hope for the future. Parents told the charity that they were ‘killing themselves’ to pay the bills and rising prices mean that parents are unable to save for their children's future.
The survey found that babies and children are losing out as parents switch to cheaper milk formula for new babies and cut fresh fruit and vegetables from children's diets because, as one mother put it, ‘it is just too expensive’. Anyone who has been to the butcher recently will know that meat is fast becoming an expensive luxury and many families are paying more for their annual season ticket to work than they are on their mortgage. Cuts to Child Benefit, child care subsidies and tax credits are exacerbating the situation.
This is an appalling state of affairs made worse by rising debt. The Consumer Credit Counselling Service reports that at the end of last year, the average household was paying almost £200 per month in interest, representing nearly a quarter (23.8%) of available income. If proof were needed of the difficulties facing families, it is in the recent figures from the Bank of England which show that credit card companies wrote off £3.64 billion in consumer debt in 2011. Some 7% of all outstanding debt on credit cards was declared unrecoverable last year.
There has been considerable pressure on chancellor George Osborne to accelerate the increase in personal tax allowances, scheduled to reach £10,000 by 2015, to take low income families out of taxation altogether. And there is a sound economic case for doing so. Any extra in the monthly pay packet of those on average earnings or less will be spent – providing a useful boost to the economy.
£10K = povertyThe biggest single reason for increasing personal allowances is that an income of £10,000 a year is the official poverty level. Yet over a million working people on the minimum wage – a pathetic £6.08 an hour or £11,065 a year- and many more part time workers on low salaries pay tax and National Insurance on these earnings and unless they have dependents, they will not be eligible for Tax Credits. Moreover the lower income 50% of taxpayers contribute only 10% of income tax or £15 billion a year out of a total income tax take of around £150 billion.
There are of course those who argue that we cannot afford income tax cuts while the government is trying to balance the books. But if personal tax allowances were raised to £10,000 for, say, the 2013-14 tax year (administratively it is too late and too expensive to alter PAYE codings for the upcoming tax year) the cost could be limited by reducing the starting point for 40% tax by the extra £1,895 given as higher tax allowances. This would bring down the threshold for 40% tax from £34,370 of taxable income to £32,475.
Balancing the booksDavid Laws, Liberal Democrat former chief secretary to the Treasury, has pointed out that any extra cost could also be covered by cutting tax relief on pension contributions to the basic 20% rate which would save an estimated £7 billion a year. There are many who believe that it is grossly unfair that the lion’s share of pension tax relief goes to higher rate taxpayers and is effectively a subsidy from the relatively poor to the relatively rich. In today’s austere environment this largesse cannot be justified.
But will Osborne listen to these calls for higher personal tax allowances and announce concessions in the upcoming Budget? Probably not. Much more likely that the Conservatives will save the big tax cuts for the Budget before the 2015 election so that they get all the credit for putting more money in people’s pockets. But voters should remember that higher personal allowances were never Conservative policy and the £10,000 level by 2015 was only adopted after pressure from the Lib Dems.
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