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Tax changes to leave 18m families worse off, report finds

21/05/2008

Some 18 million families will be worse off by an average of £150 a year as a result of the recent tax and benefit changes, research from economists has found.

Institute for Fiscal Studies (IFS) researchers claim many families will be worse off within two years with the abolition of the ten per cent tax band and a cut in winter fuel payments, despite the increase in the personal allowance.

Some 21.3 million families will be better off this year than they would have been without the one-off higher personal tax allowance and benefit changes announced in Budget 2007 and subsequently, IFS said.

But in the absence of further policy changes, the next two years would see many families made worse off as the one-off income tax cut and this year higher winter fuel payments disappear, and as the upper earnings limit for National Insurance contributions rises.

"Some 18 million families would be worse off in 2010-11 than they are in 2008-9 as a result of these changes, with 3.6 million families gaining and ten million broadly unaffected.

"Reversing the increase in the personal allowance would mean that 5.4 million families would not have been compensated in a lasting way for the abolition of the ten per cent band," IFS said in its report.

But retaining the higher personal allowance would require the government to find around an extra £2.7 billion a year, while keeping the winter fuel payment at its winter 2008 level would require another £575 million a year, the report added – leaving the government with some tough decisions.

Robert Chote, director of the IFS, said: "By announcing a big one-off increase in the personal income tax allowance, Alistair Darling has not only created millions of winners this year; he has created millions of potential losers next year.

"On the evidence of its recent decisions, the government may well be afraid to take their gains away from them. If public sector borrowing ends up permanently higher as a result, it will further undermine the credibility of the government management of the public finances and increase the probability of future tax increases or spending cuts - perhaps soon after the next general election."

If the raised personal allowance is kept, the IFS estimates that the government's self-imposed debt ceiling of 40 per cent of national income would be breached by about £5 billion in today's terms in 2010-11.