TUC says biggest losers from tax policies are the poorest households
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 .
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.”
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