House of Commons - Treasury - Thirteenth Report

Select Committee on Treasury Thirteenth Report

3 The initial effects of abolition and related Budget measures

40. This chapter seeks to analyse the impact of the abolition of the 10 pence starting rate of income tax as it was intended to be implemented prior to the announcement of 13 May 2008 in the context of other Budget measures. It is important to analyse this impact for several reasons:

That analysis relates to the direct tax burden that is currently faced by individuals and households in the United Kingdom and will be faced by them until September, albeit with the prospect of a reduction in that burden with retrospective effect;

It provides the context for understanding the options considered and the decision eventually taken on 13 May relating to the current tax year;

It provides an essential part of the context for understanding the options for future tax years, given that the Government is not committed to making the changes announced on 13 May a permanent feature of the tax system; and

It sheds light on the quality and comprehensiveness of the information available to and provided by the Treasury about the impact of the measures announced in the 2007 Budget.

The measurement issues

OVERVIEW

41. When considering who has lost or gained from a taxation measure outlined in a Budget, the first consideration must be the losses and gains derived from the reform to the taxation system alone, without regard to any other changes in the tax credit or benefit systems that may be occurring at the same time. The second consideration must be to then add in any reforms to the tax credit and benefit systems that may affect an individual taxpayer, or the household in which that individual taxpayer resides and which might reasonably impact on that individual. There may then be further measures that benefit the individual, such as those measures relating to dependent children, which have to be accounted for in calculating gains and losses at a household level. As such, the number of gainers and losers from an overall package announced in a Budget may not be immediately transparent.

UNIT OF MEASUREMENT: INDIVIDUAL VERSUS HOUSEHOLD

42. One of the more complicated aspects of our inquiry has been the different units of measurement used to identify the numbers of losers. The personal taxation system is based on an individual's level of income, and has no regard to the other people that taxpayer may live with, or how taxpayers may share their individual income within a household. This has been the case since the introduction of personal taxation in 1990.[116] Witnesses at other inquiries we have undertaken have emphasised the importance of individual taxation. In 2006, Dawn Primarolo MP, then Paymaster General, in describing the operation of the tax credit system to the Sub-Committee, highlighted both the interrelated nature of the tax and tax credit systems, but also the importance of the idea of independent taxation:

The award notices have two functions, of course, and one is to do with independent taxation because under independent taxation we notify individuals direct and with the tax credit system we are using household income because it was to be paid to the main carer, normally the mother, so 80% plus will go to women. When we send out award notices we ensure that both individuals in respect of independent taxation get those award notices. What has happened therefore is that every change that occurs to the information that the computer has immediately generates to both because as a woman I am going to defend independent taxation, and I am sure you would; it took women a long time to get independent taxation.[117]

43. However, the Government often uses the 'household' as a measurement unit. For instance, it is used by HMRC when operating the tax credits system. In its evidence to us, the Treasury emphasised this important difference between the operation of the taxation and tax credit systems when calculating the number of losers, and why the Treasury prefers using households as a measurement unit:

Budget 2007 announced a number of measures to income tax, national insurance and tax credits. Income tax and national insurance operate on an individual basis. In contrast tax credits are awarded to a family based on their family income and it is difficult to assign these to one individual in the family when the whole family benefits. All the parts of the package were designed to complement each other so the impact of the package needs to be looked at as a whole; looking at any aspect of the package in isolation would give an incomplete picture. For these reasons the Government's analysis is on a household basis.[118]

UNIT OF MEASUREMENT: HOUSEHOLD VERSUS FAMILY

44. The IFS and the Treasury use different definitions of households when presenting their analysis. In a memorandum prepared at the request of the Committee, the Treasury explained the difference between the two measures:

A household is defined as all persons living at the same address who either share one meal a day together or share the living accommodation (i.e. living room). A benefit unit, hereafter referred to as a family or family unit, consists of a single person or a man and a woman living together who are married or are living together as if they were married. Dependent children are allocated to their parent's family unit and are defined as any person under 16 or any unmarried 16-19 year old eligible for child benefit. Same sex couples were treated as separate families until late 2005.[119]

The Treasury then went on to explain the reasoning behind the difference:

the IFS have presented their analysis for families and HMT for households. As many income-related benefits and tax credits are allocated to a family based on family income it is difficult to assign these to an individual and therefore to produce "winners" and "losers" at an adult level. The IFS opted to produce analysis of the overall package at the family level for this reason. This is a perfectly valid choice, and one that HMT does not dispute.

HMT, however, chooses to produce analysis on households. There are several reasons for this. Housing benefits take into account the income of all "family" units in a household. If income changes for a non-dependent in a household receiving housing benefits, it may affect the amount of housing benefit or council tax benefit received by the family claiming these benefits, even if their income does not change.[120]

The IFS provided the following explanation as to what such an identification would mean when considering the analysis of the losers and winners from the abolition of the starting rate of income tax:

The distributional analysis done by the Treasury is usually performed at the 'household' level (in other words, income of all individuals in a household is added together, so that a fall in income experienced by one adult might be offset by a gain experienced by someone else in the household). As we show later, fewer (in absolute and proportionate terms) households lose than families, often reflecting the fact that parents who gain could compensate offspring living at home who lose, although they may choose not to do so.[121]

DEFINING A LOSING 'UNIT'

45. There was also a difference between how the IFS and the Treasury defined a losing family or household. According to the Treasury, it

judges a household to be a 'loser' if the household has a fall in weekly net income of more than 5p, and a 'winner' if the household has a gain in weekly net income of more than 5p. The IFS uses a level of +/- £1 per week to assess if a household has 'won' or 'lost'.[122]

WHY UNITS OF MEASUREMENT ARE IMPORTANT

46. Understanding the units of measurement are important for two reasons. First, differences in method help to explain why the Treasury and the IFS might not agree on the final numbers, or characteristics, of losers. For example, a 'losing' individual might be a young man or woman, living at home with his or her parents but no longer dependent on them. The IFS model would see this person as one 'family', and place them in their age range for statistical purposes. The Treasury would place them in a household headed by whoever was the Household Reference Person—the person who owns the home, or is legally responsible for the rent[123]—who could be somewhat older. The Treasury memorandum explains the impact of this distinction:

The IFS analysis suggests 0.5 million adults aged under 25 paying more tax and not receiving tax credits to offset the increase. These families will not show in HMT analysis as many of them will live in households with other adults. These other adults may gain more to offset the losses incurred by the under 25 year old.[124]

47. The other reason why the differences are important is that the tax system operates on an individual basis, and that individual may not wish to regard themselves as part of the household as defined by the Treasury. For instance, a household overall may have benefited from the changes announced in the 2007 Budget and the subsequent Pre-Budget Reports and Budgets as intended to be implemented prior to 13 May, because one earner in the household received a higher income than the other earner, and thus the higher earner's 'gain' outweighs the other earner's 'loss'. However, on an individual basis, one earner had still been made worse off, and may have regarded themselves as a 'loser' from the Budget.

Those who benefit or are not adversely affected

48. The measures announced in the 2007 Budget led to most taxpayers gaining, principally because for most taxpayers the loss from the removal of the 10 pence tax rate was more than offset by the gain from the reduction in the basic rate of income tax from 22 pence to 20 pence. The IFS identified the following 'gainers' from the reduction in the basic rate:

Most people aged under 65 with non-savings income between £19,355 and around £40,000 gained noticeably from the Budget 2007 income tax changes, with the biggest gain, of £336 a year, at an income of £36,140. These people gain more from the cut in the basic rate than they lose from the abolition of the 10% band and the rise in the upper earnings limit for National Insurance Contributions.[125]

The LITRG also identified for us the following gainers from the personal tax changes:

Once an individual's income is above a certain level, they win from the changes no matter what their circumstances. That level in simple terms is some £17,500; taking into account the increase in personal allowances, the break point comes down to £16,500. If somebody is in work throughout the year, and therefore paying [National Insurance Contributions] consistently, the break point comes down further to £15,500.[126]

49. The LITRG also identified those who did not gain from the main changes in income tax bands and rates, but gained through the other measures in the 2007 Budget that we described earlier:[127]

There is also compensation for those aged 65 and over (whose personal allowances rise beyond the level needed to compensate); and for those who claim and receive tax credits, through above-inflation increases in the first income thresholds for claimants of both Working Tax Credit … and Child Tax Credit … and a substantial increase in the amount payable under Child Tax Credit in respect of each child.[128]

The IFS confirmed this point, describing the 2007 Budget as "closely calibrated" so that certain groups were protected from the effect of the loss of the 10 pence rate of tax, so that:

no individual aged 65 or more was paying more income tax as a result of the reforms, and many were paying less because of the rise in the extra tax allowances for those aged 65 or more [and] single-earner families receiving tax credits were no worse off as a result of the reforms (because of the increased generosity of the Child and Working Tax Credits). Those with children were mostly better off.[129]

The losers

THE OVERALL NUMBER OF LOSERS

50. The initial estimate from the IFS was that there were 5.3 million 'losing' families from the measures announced in the 2007 Budget. The IFS definition of a losing family was one that lost more than one pound a week.[130] The 5.3 million families figure was based on the assumption that there was full take-up of all available tax credits and benefits.[131] Estimates by the IFS at the time of that Budget suggested that if no single person took up Working Tax Credit, the number of losing families would rise to 5.9 million.[132] In their written evidence for our inquiry, the IFS then updated these figures:

Recalculating the number of losers taking account of all measures in Budget 2007, PBR 2007 and Budget 2008, we now estimate that 5.2 [million] families would have fallen into these categories and been worse off, if all those entitled to tax credits took them up. If no-one without children took up the Working Tax Credit to which they were entitled, the number of families losing would have been 5.4 [million].[133]

The number of losing families lies somewhere between these two figures, because, according to data released by HMRC, take-up of Working Tax Credits among households without dependent children rose to 28% of money being claimed in 2005-06 and to 22% in 2005-06 when measured by caseload.[134] The Treasury also released its own estimate of the number of losers, in a parliamentary answer in October 2007. It stated that 5.3 million households (rather than families) had lost, using the Treasury's definition of loss.[135]

LOSERS IN TERMS OF AMOUNTS LOST

51. The overall calculation of the amounts lost per week, on a household or family basis are, of course, dependent on the circumstances of that household. Numerous factors would determine whether a household or family did or did not lose out from the abolition of the 10 pence rate of tax as initially implemented, including the number of earners within a household, the age of the earners in the household, the incomes of earners in a household, whether or not they were eligible, and had taken up, any benefits and/or tax credits and whether a household or family had dependent children. The IFS stated that the following groups were the main losers when the tax changes were taken in isolation from any other changes:

People aged under 65 with non-savings income between £5,435 and £19,355 would have paid more income tax as a result of the Budget 2007 changes, because they lost more from the abolition of the 10% rate than they gained from the cut in the basic rate. This loss is greatest, at £232 a year, for someone earning £7,755, the top of where the 10% band would have been.[136]

The TUC pointed out that this would mean that "the worst losses [are] concentrated on those earning around £150 a week".[137] CPAG emphasised that this maximum loss of £232 a year was on an individual basis.[138] As such, a couple each of whom earns £7,755, both of whom are aged 24 (and thus not eligible for Working Tax Credit) and claiming no other type of benefit could conceivably lose £464 a year as a household.

52. In its written evidence to us, the Treasury provided information we had requested for the distribution of the annual losses by type of household, which can be seen in Table 1:

Table 1: Distribution of annual losses in income tax payments in 2008-09 under system as planned to be implemented prior to 13 May by household type

Source: Ev 128

THOSE BETWEEN 60 AND 64

53. To a very large extent, those aged 65 and over were insulated from adverse consequences of the abolition of the 10 pence rate of income tax because of the increases in allowances for those aged 65 or over that we noted earlier.[139] The IFS noted one exception to this protection: in certain unusual circumstances it was possible for someone aged 65 or over to lose, notably if they had non-savings income (including pension income) below £19,355 and savings income above £9,635.[140] However, the State pension age for women born on or before 5 April 1950 is 60, compared with 65 for men.[141] This difference meant that some women aged 60 to 64, in receipt of the State Pension, were losers from the abolition of the 10 pence rate of tax, and were not compensated by the increased personal allowances for those over 65. There may be particular reasons why the effect was greatest on women aged 60 to 64, including the fact that on average women have lower levels of occupational pension provision and lower levels of benefits where they have an occupational pension. The Pensions Commission's analysis, for example, showed that:

Current female pensioners receive much lower levels of occupational pension because during working life they had much lower levels of employment, a greater tendency to be in part-time work, lower average earnings, and a greater tendency to work in service sectors where pension provision was less prevalent.[142]

Ms Teresa Perchard, Director of Public Policy, Citizens Advice, suggested that for this group of people, the loss could be significant:

Certainly the initial impact of the abolition of the 10p tax rate brought a lot of pensioners aged 60 to 64 into [Citizens' Advice Bureaux], who were reporting they expected a doubling of their tax bill (quite small amounts of money but big for them) up from £5 a week to £10 a week, and they were a bit shocked about what they were going to do.[143]

Ms Perchard went on to give an example that highlighted the particular difficulties for this age group the loss of the 10 pence tax band had caused, against a backdrop of rising prices:

It tended to be women of 60-61 up to 64 with a mixture of income from state retirement pension and some private pension who were suddenly faced with paying twice as much tax as they were earlier this year. In one particularly good case, somebody's tax liability went from £400 a year to £600 a year and she did not know how she was going to afford the £200. Her combined income from all pensions was £8,500, she was a homeowner, with too large an amount of savings to qualify for other means-tested benefits, so you might say she is quite well off, but she is in her early 60s, she has a small amount of savings to see her through, and often we are finding people are using that to pay fuel bills as well.[144]

54. During our inquiry into the 2007 Budget, Mr Chote told us that there would be 0.3 million losing women in this category.[145] During the current inquiry, the trade union UNITE and the Civil Service Pensioners' Alliance put the figure somewhat higher:

Statistics from the Department for Work and Pensions indicate that 0.6 million women aged between 60 and 64 will see their income decreased by £1.95 a week on average.[146]

There are also men in this age group who may be adversely affected. This point was made by Age Concern, who told us they had "also heard from men aged 60 to 64 and people approaching 60 who are either retired or on low earnings".[147] However, such men have retired early in the eyes of the State, and we consider them in the next section.

THOSE WHO RETIRED EARLY

55. Apart from those women aged 60 to 64, who are regarded by the State as pensioners, there are a number of people who have retired before State pension age, including men aged 60 to 64. These early retirees are particularly vulnerable to changes in the taxation system, because they are no longer working, and therefore cannot undertake certain coping strategies, such as increasing their hours, that those who are economically active can undertake. Age Concern noted that:

It is particularly difficult for those who are already retired, perhaps having been forced to stop working due to ill health or redundancy, and have little option of increasing their income.[148]

Mr Whiting highlighted the problems faced by this group of people:

I have come across a number of people who have genuinely taken early retirement in their late 50s, who by their nature have probably worked out quite carefully what their package was, they are articulate, they have spotted this during the last year and I have dealt with many of them who of course have seen this.[149]

Age Concern also noted the care with which some of those within these affected groups planned their finances:

People in their late 50s who were forced to leave work due to ill health or retired early, perhaps to provide care or be with an older partner. These groups also feel aggrieved that having planned their finances tax rules have changed.[150]

56. Some may have been forced into early retirement by disability. We consider in the next section those on incapacity benefit, but the TUC highlighted the problems faced by this particular group of people:

Retired people aged under 65 with low incomes include people who were forced by the onset of disability into early retirement and rely on occupational pensions paid at a reduced rate because of the age at which they began claiming. Some are widows with very small survivors' pensions; others are people pushed into retirement by organisations with a mandatory retirement age of 60. These groups may be small, but they are all very deserving.[151]

Joan Walley MP, the Member of Parliament for Stoke-on-Trent North, highlighted that there were geographical clusters of people who had been forced to take early retirement:

The effects of the abolition were felt strongly in my constituency, a former coal mining community which is ranked 15th in the 2007 index of deprivation. There are characteristics unique to former coal mining communities such as Stoke-on-Trent which have made people particularly susceptible to the abolition of the 10p tax rate. The heavy nature of the work has resulted in many people being forced to take early retirement, often due to ill-health. This has resulted in many people below 60 years of age, claiming a pension, who have seen their tax increase markedly as a result of the changes.[152]

PEOPLE ON INCAPACITY BENEFIT

57. Incapacity Benefit is a taxable benefit, once the first 28 weeks of benefit have been paid, or if the benefit was payable for a period of incapacity which began before 13 April 1995, and for which Invalidity Benefit used to be payable.[153] JobCentrePlus provides the following advice to potential claimants on the rules around permitted work:

You can work less than 16 hours a week and earn no more than £88.50 a week, for up to 52 weeks. At the end of 52 weeks if you cannot start employment of 16 hours or more a week you must wait another 52 weeks before you apply for this type of permitted work again. While you wait, you can still work, but you must not earn more than £20 a week.

You can work as many hours as you like, as long as you earn no more than £88.50 a week, if you are supervised by someone who is employed by a public or local authority, or a voluntary group, and

it is their job to arrange work for sick and disabled people
they give you regular help for you to do your job, or as part of a hospital treatment programme, and
the work is part of a treatment programme and done under medical supervision, either as an in-patient or an out-patient of a hospital or similar institution.

For example, you might be working in the community, in a sheltered workshop, or as part of a hospital treatment programme. [This is referred to as supported permitted work.]

Some people with serious medical conditions do not need to have a medical examination to be assessed as not being able to work. If this applies to you, you can choose how long you work for, but it must be less than 16 hours a week and you cannot earn more than £88.50.

You should be paid at least the National Minimum Wage for any work that you do.[154]

58. Many of those who wrote to us to express their concern about the loss of the 10 pence tax rate were disabled. They are likely to be adversely affected by the removal of the starting rate because, if they are eligible for taxable Incapacity Benefit, and only permitted to earn up to £88.50 a week, they are in the income bracket that places them as a potential loser, but they are not able to earn more to overcome the loss even if their health allowed because of the rules governing Incapacity Benefit. Some Incapacity Benefit claimants may also be in receipt of a pension, although long-term Incapacity Benefit is not be paid to those over State pension age.[155] Capability Scotland, a Scottish disability charity, provided the following example of how on individual on Incapacity Benefit ("Mr A") was affected by the loss of the 10 pence tax rate:

Last year [Mr A's] total taxable income was £9,790.35; and his total personal allowances were £6,955. [HMRC] then deducted his incapacity benefit - last year it was £4,227. This left him with £2,728 non taxable income. Therefore for the tax year 07-08, the first £2,720 of his pension was tax free, the next £2,150 was taxable at the rate of 10%, and the rest was taxed at 22%. He was paying a tax bill of £109.18 per month.

This year he has seen a £552.01 increase in his yearly income, bringing it up to £10,342.36. His P2 for 08-09 shows his total personal allowances have also risen, to £7,235 and his taxable Incapacity Benefit has risen to £4,390. Therefore for the year 08-09, the first £2,840 of Mr A's pension is tax free and the rest is taxable at the new rate of 20%. He is paying a tax bill of £125.03 per month; a rise of £190.20 per year.

If his tax situation had remained the same as last year, his tax would have gone up to £116.04 per month; a rise of £82.32 per year. Therefore, with the abolition of the 10% tax threshold he is now paying £107.88 more than he would have if it had remained.[156]

THOSE ECONOMICALLY ACTIVE AND NOT ELIGIBLE FOR WORKING TAX CREDIT

Those aged under 25

59. The SMF estimated that 1.5 million single people aged 16 to 24 without dependent children lost from the abolition of the 10 pence tax rate, because they were too young to be eligible for the compensation available through Working Tax Credit.[157] Some of those excluded from the compensation provided through Working Tax Credit by this eligibility criterion will be in public service. The British Legion pointed out that many serving in the armed forces will have found themselves in the income range that lost out from abolition of the 10 pence tax:

It is likely that within … largely low ranking junior positions there are a high number of childless personnel aged under 25 years who are not eligible for Tax Credits. As a result they now find themselves paying more tax and not benefiting from the changes to the Tax Credits programme.[158]

Working hours eligibility

60. The IFS highlighted "families [without children] in which no adult worked 30 hours a week or more (including retirees under state pension age)" as losing from the removal of the starting rate of income tax because those families would not be eligible for Working Tax Credit.[159] The SMF suggested that there were "250,000 single childless workers not entitled to tax credits because they work fewer than 30 hours per week".[160] Ms Perchard stated that some of these losers, ineligible for tax credits because of the part-time nature of their work would be a particular group, namely:

carers who may be in part-time work, not looking after a child, looking after an adult, and not able to work 30 hours a week because they have got that responsibility, and we would like to have a discussion with the Government about whether there is scope to extend eligibility to Working Tax Credit.[161]

Household income eligibility

61. As we noted earlier, from April 2008, the Government increased the extent of eligibility to Working Tax Credit among single adults without children by increasing the threshold by £1,200.[162] However, some households remained unable to claim tax credits because their household earned too much, but were still affected by the loss of the 10 pence tax rate. Citizens Advice placed these people in two groups:

Couples whose joint income is above £17,500, which pushes them beyond entitlement to Working Tax Credit, or whose award will not be enough to compensate them for tax rises on both incomes;

Some single individuals (over 25) who, though paying more tax as a result of the change, are currently earning too much to be entitled to Working Tax Credit.[163]

The SMF estimated that "900,000 single childless workers earning between £13,000 and £19,000, who earn too much to receive tax credits" would be in the second group identified by Citizens Advice.[164] The IFS suggested that, prior to the implementation of the 13 May announcement of the £600 rise in personal allowances, the level of income that would have made someone ineligible for tax credits would be "around £12,900 for single adults without children, and £17,500 for couples without children".[165]

Other grounds of non-eligibility

62. Citizens Advice highlighted another group of potential losers, namely "migrant workers who meet the age and hours rules [of Working Tax Credits] but are not entitled to claim Working Tax Credit because their immigration status gives them no right to public funds".[166] The LITRG pointed out that some of these migrant families may also contain children,[167] while also noting that "some migrant workers [would] be able to claim [Working Tax Credit] if their partner is not subject to immigration control".[168]

THOSE ELIGIBLE FOR WORKING TAX CREDIT

63. Broadly speaking, those losing from the removal of the starting rate of income tax are those outside the tax credits system, but there are some losers among those eligible for Working Tax Credit. The first group of losers, according to the IFS, are those in families

receiving tax credits but with two earners, each paying more income tax as a result of the reforms, where the increased entitlement to tax credits may not have been enough to compensate for two adults paying more income tax.[169]

The second group of those eligible for Working Tax Credit, but losing from the removal of the starting rate are those who do not claim their entitlement. We referred earlier to the problem of low take-up of Working Tax Credit among those without dependent children earlier, and we return later in this Report to measures to increase take-up.[170]

THE LOSERS AND LOW-INCOME HOUSEHOLDS

64. In answer to a question asked by the Chairman of this Committee on the floor of the House on 23 April, the Prime Minister stated that:

I have to point out to the Treasury Committee that 70% of the people who were losing under the [2007] Budget have incomes above £20,000 … It is important to recognise that of those who lost in that Budget 70% earned above £20,000.[171]

We requested clarification from the Treasury as to how this figure had been calculated. In providing clarification, the Treasury changed the unit of measurement from people to households:

The Government analyses the impact of all Budget and PBR personal tax and benefit measures on households through HM Treasury's tax and benefit micro-simulation model. Analysis of Budget 2007 simulations show that 70% of households that pay more net tax as a result of the reforms have a household net income of more than £20,000.[172]

When we questioned Treasury officials on the difference between the two statements, Mr Jonathan Athow, responsible for Work Incentives and Poverty Analysis in HM Treasury, replied that it was "A simple confusion of people and households".[173]

65. Other evidence we have received also pointed out that low-income individuals need not belong to low-income households. The NPI stressed that "The link between low-paid workers and low-income households is weak, with only 16% of low-paid workers in a recent study belonging to households with incomes below the official income poverty line".[174] Barnardo's observed that "The majority of the losers, although by definition on low earnings, are in the middle of the household income distribution, not the bottom".[175] The Resolution Foundation sounded the following warning about the situation of these workers:

Low earners can be overlooked by policy-makers and practitioners within government, the third sector and the private sector. They are not the poorest or most excluded yet, having only modest incomes, often struggle within the mixed economy and can fare poorly in their access to private markets, some public services and third sector provision.[176]

Understanding the impact of abolition

66. Although it is of fundamental importance to understand the details of the composition of the group who lose from the removal of the starting rate of income tax and the scale of their losses, there is a danger of seeing this as a series of segmented calculations. To do so would be to understate and misunderstand the senses of grievance and disorientation created by the tax changes. Those senses arise in part from the fact that losses have a very direct impact on those with limited, and often fixed, incomes for whom the management of personal or household finances involves what Citizens Advice characterised as "a very fine balancing act".[177]

67. The impact of the abolition of the 10 pence rate of income tax has also been accentuated by the economic circumstances in which it is coming into effect, with household budgets coming under increasing pressure from a number of sources. The credit crunch has led to a tightening of credit conditions, resulting in higher interest payments for many, even at a time when base rates have been falling.[178] The cost of living is rising at a very rapid rate by recent standards. According to Energywatch, household energy bills rose about 15% in the first quarter of 2008, contributing to Citizens Advice receiving a sharp increase in enquiries about fuel debt.[179] The price of petrol has risen by 18% in the last year and that of diesel by 30%, and the Chancellor of the Exchequer acknowledged that "people are finding the price of petrol and diesel is an increasing burden on them".[180] Food prices rose in the year to April 2008 by 7.2%, well above the overall rate of inflation.[181] The Local Government Association predicted that council tax would rise 4% this year on average, with these higher rates taking effect from April 2008.[182] The official rates of inflation, whether measured by the Consumer Prices Index or the Retail Prices Index, may disguise the actual rate of inflation for low-income households, because a higher proportion of their expenditure than that of other households is devoted to non-discretionary spending on those goods and services which are subject to some of the sharpest price increases at present. The Department for Environment, Food and Rural Affairs' (DEFRA's) Monthly Farming and Food Brief for April 2008 stated that "rising food prices have a disproportionate effect on low-income groups who spend a greater share of their budgets on food (around 15%) than the richest (7%)".[183] The correspondence which we as a Committee have received, and which individual Members of Parliament have received from their constituents, reflect these wider economic circumstances as well as the immediate impact of the tax changes.

Conclusions

68. We have received and summarised very detailed information on the size and composition of the group of people who stood to lose from the removal of the starting rate of income tax as initially implemented. It must be borne in mind that the use of the household as a unit of measurement does not necessarily correspond to social realities, in that a household may not equate with a single financial unit with a shared household budget. Therefore, it is clear that this group does not exactly equate to the very poorest in society and that many within that group are not living in low-income households. The losers from the measures as initially implemented were people whose taxable income was small, and for whom the loss might be significant when required to manage a personal or household budget at a time of sharply rising prices for many essential goods and services. In assessing the impact of the removal of the starting rate as initially implemented, account also needs to be taken of the impact on those for whom their own income stream was an important benefit of independent taxation. In this context, the effect was particularly marked on women aged 60 to 64 in receipt of the Basic State Pension and modest payments from an occupational pension scheme. A significant number of that group would have been paying around twice as much income tax in 2008-09 as they were in 2007-08. The adverse effects were also magnified in some ways for those individuals paying tax, but not working, and thus less able to respond by seeking additional earnings.

116 IFS, "A survey of the UK tax system", Briefing Note 9, November 2001, p 29 Back

117 HC (2005-06) 811-II, Q 327 Back

118 Ev 124 Back

119 Ev 171 Back

120 Ibid. Back

121 Ev 40 Back

122 Ev 172 Back

123 Ev 127. For a further discussion of the Household Reference Person, see paragraph 88. Back

124 Ev 127 Back

125 Ev 42 Back