IFS: tax and benefit changes hit richest and poor parents hardest

22 Jan 15

Low-income families with children and the very well off are the two groups that have lost the most from the coalition government’s changes to tax and benefits for working-age people, the Institute for Fiscal Studies has found.

Analysing the impact of spending decisions taken since 2010, the economic think-tank said tax changes, which include below-inflation uprating of the 40p tax bracket, had seen the richest tenth of households lose over £2,000 a year, or over 2% of their income.

The real-terms reductions in the level of earnings at which the higher 40% rate of income tax is applied over the parliament had more than cancelled out the reduction in the additional rate of income tax from 50% to 45% in April 2013, the report stated.

Richer households had also been affected by the increase in VAT to 20% and restrictions on tax relief applied to pension contributions.

The poorest tenth of households had lost out due to changes in benefits, in particular through the move to uprate most benefits and tax credits by the Consumer Prices Index measure of inflation, rather than the higher Retail Prices index. This change provided the biggest single saving of the government’s welfare reforms, cutting an estimated £4.2bn from spending by 2015/16, while a 1% cap on most working-age benefits and tax credits for three years from 2013/14, is expected to save £1.7bn. The poorest 10% had lost around 4% of their income as a result of the changes, with the second poorest decile losing around 3.5%.

By contrast, middle-income working age households had been left unscathed, senior research economist James Browne said, with those without children having gained overall through increases to the tax-free personal allowance.

‘How much different households gain or lose from tax and benefit reforms depend partly on whether you look only at those introduced by the coalition or include all changes that have been introduced since the start of the fiscal consolidation in 2010. It also matters how you define a “reform”,’ he said.

‘But whichever way you cut it, low-income households with children and the very richest households have lost out significantly from the changes as a percentage of their incomes. Increases in the tax free personal allowance have played an important role in protecting middle-income working-age households meaning that those without children have actually gained overall.’

The IFS’s election briefing note, produced with funding from the Nuffield Foundation, also found that households in London have lost more on average than households in other parts of the UK. This was due to the larger proportion of richer households in London and the reductions in Housing Benefit, as the capital has both more people renting and high rents.

Did you enjoy this article?