Poorest households to be £70 worse off after this week’s tax and benefit changes
The poorest third of households are set to be £70 worse off on average while the richest half of households will receive four-fifths of the tax cut windfall, according to analysis by the Resolution Foundation.
The think-tank looked at the winners and losers from the key tax and benefits changes coming into effect on 6 April which will see £2bn worth of income tax cuts. But £1bn in welfare cuts will also be introduced, resulting in a net £1bn giveaway.
These are the changes coming into effect in the new financial year:
- The personal tax allowance will rise from £11,000 to £11,500
- The Higher Rate Threshold will rise from £43,000 to £45,000
- All working age benefits will be frozen, which would otherwise have increased by 1%
- The family element (£545) from tax credits and Universal Credit (UC) for new claims or births will be removed
- A two-child limit to new claims or births in the tax credit system will be applied, which ends entitlement of support of up to £2,780 for any additional children.
The Resolution Foundation said the removal of the family element from tax credits and UC is expected to affect 270,000 families in 2017/18, rising to 1.2 million by 2020/21. Plus, limiting the child element of tax credit and UC support to two children is expected to affect 160,000 families in 2017/18, rising to 640,000 by 2020/21.
As a result, it said the better-off half of households will receive 70% of the tax cut windfall while the poorest third of households will shoulder 67% of the benefit losses, meaning a “significant transfer from low and middle income households to richer ones”.
However, it noted that other non-tax and benefit policies that come into effect next financial year – including the 30p rise in the National Living Wage from 1 April, tax free childcare from the end of April and an extra 15 hours of free childcare from September – will also benefit some households.
But it said the majority of this additional support will benefit richer households and is “not sufficient to offset losses for the poorest households”.
Its calculated the losses and gains of these family types:
- A low-income single parent family with a baby, earning around £17,000 a year, will be £530 worse off overall, losing £610 from benefit cuts while gaining £80 from tax cuts
- A middle-income dual working couple, earning £33,500 a year, with three children including a new baby will be £2,500 worse off overall, losing £2,700 from benefit cuts while gaining £160 from tax cuts
- A high-income couple with two children, earning £100,000 a year, will be £480 better off overall, with no benefit losses and all gains stemming from tax cuts.
Torsten Bell, director of the Resolution Foundation, said: “Following the Budget the rights and wrongs of a relatively small National Insurance change for the self-employed have dominated the headlines. But the real tax and benefit debate is about much bigger policy changes being rolled out this week and in the coming years.
“These amount to unwise giveaways to richer households and unjustifiable takeaways from less well-off families. The result is higher inequality and a decision to squeeze living standards for low and middle income families at a time when rising prices are already outstripping wage growth.
“As the Prime Minister rightly looks to bring the country back together and ensure 21st century Britain works for everyone, thinking again about these policy choices would be a good place to start.”