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Poor families will ‘gain nothing’ from personal allowance increase

Joanna Faith
Written By:
Joanna Faith

Poor households are the biggest losers from the Government’s tax policies, new TUC research reveals.

The report, which looked at the impact of tax changes over the course of this parliament, found that 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.

It showed 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% in January 2011, leaving them with a total annual loss of £164.84 as a result of the government’s tax policy.

The findings are contrary to ministers’ claims that raising the personal allowance to £10,000 would put ‘more money in the pockets of people who need it’, as the very poorest households will feel the biggest pinch, the TUC said.

Families at the very bottom of the income scale (on average, £53.81 a week) will suffer a 6.3% drop in their overall income as a result of the VAT rise, personal allowance increase and other minor tax changes.

The research found that 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.

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.”