Tax and benefit changes introduced by the coalition have reduced household incomes by an average of 3.3%, but there has been a disproportionate impact on both low-income families and the very rich, according to the Institute of Fiscal Studies (IFS)
The economic think-tank has calculated that all households have seen a £1,127 a year cut, but that low-income working-age households with children have lost the most as a percentage of their income, mainly as a result of changes to benefits.
The IFS calculations also suggest the richest households have lost the most both in cash terms and as a percentage of income from the overall tax and benefit changes that have taken place since the beginning of 2010. Below-inflation uprating of the 40p tax bracket, has 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.
Middle-income working-age households without children have gained the most from the coalition’s changes. The IFS says they have gained significantly from the coalition’s large increases in the income tax personal allowance and are much less affected by benefit cuts.
According to the IFS, childless households have had a mean gain of £199 each from the changes brought in since 2010. However, households with one child have lost £648 and households with two children have lost £1,202.
London has been harder than other areas of the country by the changes because many high income households are in the capital. London has also got more renters, meaning that housing benefit cuts have hit the capital disproportionately.
James Browne, a senior research economist at IFS and a co-author of the report, said: ‘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 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. 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%, the IFS says.
Browne said: ‘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”.
‘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.’
