April tax and benefit changes will hit the richest hardest

28 Jan 11
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.

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.

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