VAT hike will cost lowest-paid workers four times more than any gain from the £10,000 personal allowance

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date: 17 March 2013

embargo: 00:01 hours Monday 18 March 2013

VAT hike will cost lowest-paid workers four times more than any gain from the £10,000 personal allowance

By the time of the next election low-paid workers will be losing up to four times more per year from the government's increase in VAT than they will gain from the raising of the personal tax allowance to £10,000, new TUC analysis has revealed today (Monday).

The research, which looks at the impact of both direct and indirect tax changes over the course of this parliament, shows that a household with an average weekly income of £195.92 (the lowest income band for working people) will gain £1.09 a week from the above inflation rises in the personal allowance by 2015.

However, this same family will lose £4.26 a week through the increase in VAT (which went up from 17.5 to 20 per cent in January 2011) - leaving them with a total annual loss of £164.84 as a result of the government's tax policy.

The TUC research shows that families on all income levels will lose more from the VAT rise than they will gain from the increase in the personal allowance and changes to national insurance.

But the very poorest households will feel the biggest pinch, says the TUC. Families at the very bottom of the income scale (on average, £53.81 a week) will suffer a 6.3 per cent drop in their overall income as a result of the VAT rise, personal allowance increase and other minor tax changes.

Lone parents will lose nearly £380 a year under the government's tax changes. The VAT rise will cost them an average of £10.20 a week, compared to a far smaller weekly benefit of £2.96 from the personal allowance and other changes.

Couples with children are also significant losers, gaining an average of £4.47 a week from the increased personal allowance - but losing £9.89 from higher VAT.

The analysis also shows how the personal allowance, which under current policy allows individuals to receive the first £9,440 of their income free of tax, will benefit higher-income households more than those with lower incomes.

People near the top of the income scale (£537.09 a week) will get £350 extra a year, while the bottom fifth of households will see increases of less than £60, which will be far outweighed by VAT rises.

The research undermines government claims that its tax policies are helping those who are the worst off, says the TUC. Richer households are gaining more from the personal allowance and suffering a smaller proportional loss as a result of the increase in VAT.

During a speech in January Nick Clegg said that raising the personal allowance to £10,000 would put 'more money in the pockets of people who need it' and has urged the Chancellor to increase the threshold as quickly as possible.

However, the TUC says the government should prioritise lowering VAT if it really is serious about helping lower-income families.

TUC General Secretary Frances O'Grady said: 'Contrary to ministers' claims, the biggest losers from the government's tax policies are the poorest households.

'It is a myth to say that raising the personal allowance will benefit those worse off in society. Low-income families will gain practically nothing from the increase in the personal allowance but will continue to lose significantly from the rise in VAT - in some cases over six per cent of their income.

'Those who will fare best through the new personal tax allowance are richer households, although even they too lose out overall as a result of the VAT rise.

'If the Chancellor really wants to make a difference to family budgets he should look at reversing his VAT hike and cuts to vital tax credits and benefits.'

NOTES TO EDITORS:

Impact of government tax policy on weekly annual disposable household incomes by household income decile

Decile

Average disposable household income (weekly)

Income tax (including personal allowance) and NICs changes (weekly)

VAT increase (weekly)

Total impact of tax changes on income (weekly)

Total impact of tax changes on income (annual)

Loss as proportion of income

1 (poorest)

£53.81

£0.01

-£3.38

-£3.37

-£175.24

-6.3%

2

£195.92

£1.09

-£4.26

-£3.17

-£164.84

-1.6%

3

£270.89

£2.90

-£5.46

-£2.56

-£133.12

-0.9%

4

£307.89

£4.16

-£6.68

-£2.52

-£131.04

-0.8%

5

£348.03

£5.14

-£8.48

-£3.34

-£173.68

-1.0%

6

£381.73

£5.87

-£10.46

-£4.59

-£238.68

-1.2%

7

£444.58

£6.53

-£11.24

-£4.71

-£244.92

-1.1%

8

£537.09

£6.78

-£13.69

-£6.91

-£359.32

-1.3%

9

£678.00

£5.42

-£14.53

-£9.11

-£473.72

-1.3%

10 (richest)

£1,272.36

-£4.58

-£19.92

-£24.50

-£1,274.00

-1.9%

All amounts are expressed in 2012/13 prices

- All TUC press releases can be found at www.tuc.org.uk

- We have assumed the personal allowance to be £9,440 in line with current policy, rising in line with CPI inflation in tax years 2014/15 and 2015/16.

- The research compares the position of households in 2015 to the position they would be in had April 2010 tax policies remained in place.

- The tables include the impact of the personal allowance along with the related alignment of the primary threshold for payment of national insurance to the personal allowance. It also considers the impact of the one per cent increase in employee and self-employed national insurance contributions, the abolition of the 50p rate and the freeze in higher income tax rate thresholds. Our analysis shows that over 90 per cent of the positive impact on households incomes comes from the increase in the personal allowance (relative to the 2010 baseline)

- The tax changes included in the model are: successive above-inflation rises in the personal allowance, the freezing of over-65 personal allowances and non-availability to new cohorts of over-65s, the adjustments to higher rate tax thresholds, employee national insurance contributions, successive above-inflation rises in the primary threshold, successive above-inflation rises in the lower profits limit and the increase in VAT from 17.5 per cent to 20 per cent.

- Nick Clegg's speech on raising the personal allowance at the Resolution Foundation on Janaury 26 2013 can be found at: http://tinyurl.com/csrtvnh

- Follow the TUC on Twitter: @tucnews

Contacts:

Media enquiries:
Liz Chinchen T: 020 7467 1248 M: 07778 158175 E: [email protected]
Rob Holdsworth T: 020 7467 1372 M: 07717 531150 E: [email protected]
Alex Rossiter T: 020 7467 1337 M: 07887 572130 E: [email protected]

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