By Lucy Phillips
31 January 2011
The highest-earning households will lose most from the
changes to taxes and benefits that are due to come into effect in April,
according to the Institute for Fiscal Studies.
An analysis by the economic think-tank, published today,
reveals that the top 10% of earners will on average lose 3% of their net income
compared to an average of 1% for the population as a whole. The fall comes as a
result of a planned 1% increase in National Insurance and a reduction in the
annual limit of tax-free pension contributions.
The richest households will also not benefit from the £1,000
increase in the income tax allowance, which from April will exempt some 500,000
people from tax altogether.
All households are set to be hit by the tax and benefit
reforms, with average incomes falling by £200 a year, the IFS says. Those
dependent on means-tested benefits will be particularly affected by the
decision to raise benefits in line with the Consumer Prices Index rather than
the higher Retail Prices Index.
At the same time, Bank of England governor Mervyn King has predicted
stagnant real earnings for some time to come – increasing the negative effect
of the tax and benefit changes.
IFS senior research economist James Browne said: ‘Further
reductions in household income are inevitable as government policies aimed at
helping to reduce government borrowing from its post Second World War high are
introduced. The set of changes coming in April is complex and the pattern of
gains and losses reflects this.’
The study also shows that about 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 kicks in.
The analysis comes ahead of the IFS Green Budget, due to be published on Wednesday. Chancellor George
Osborne will publish the Budget on March 23.
