Written evidence submitted by the Low
Incomes Tax Reform Group
INTRODUCTION
1. We welcome this opportunity of submitting
evidence to the Treasury Committee's Inquiry into the 2011 Budget.
2. The Low Incomes Tax Reform Group (LITRG) is
an initiative of the Chartered Institute of Taxation (CIOT) to
give a voice to the unrepresented. Since 1998 LITRG has been working
to improve the policy and processes of the tax, tax credits and
associated welfare systems for the benefit of those on low incomes.
3. The CIOT is a charity and the leading professional
body in the United Kingdom concerned solely with taxation. The
CIOT's primary purpose is to promote education and study of the
administration and practice of taxation. One of the key aims is
to achieve a better, more efficient, tax system for all affected
by it - taxpayers, advisers and the authorities.
INCREASES IN
PERSONAL ALLOWANCES
4. We are of course pleased to note the increase
in the basic personal allowance by £1,000 to £7,475
in 2011-12, and by a further £630 to £8,105 in 2012-13.
The Government's commitment to increase the personal allowance
to £10,000 by stages is a worthy goal.
5. However, taking people on low incomes out
of tax does not necessarily make them better off, because of the
complex interaction of the tax and national insurance with the
benefits and tax credits systems. In fact, if we take a lone parent
in particular circumstances, with one child, earning £10,000
a year, she may actually be very slightly worse off in 2011-12
as a result of all the changes to tax, NICs, tax credits, housing
benefit and council tax benefit, despite the increase in the tax
personal allowance. The annex to this evidence shows the basic
workings that produce this result.
6. Pensioners on similar incomes, whose age-related
tax allowances will increase by the RPI rather than the CPI under
the proposals in this Budget, will see the benefit of the tax
cuts being similarly whittled away by interactions elsewhere in
the tax and benefits system - though perhaps less acutely, as
their age-related allowances are higher and they do not pay NICs.
7. The point was well made by the Treasury Committee's
Report Budget Measures and Low-Income Households,[5]
the result of the Committee's inquiry in 2007-08 following the
withdrawal of the 10% starting rate of tax. To quote from the
Summary to that Report:
"We recommend that the Government publish a
Household Impact Assessment alongside future Budgets and Pre-Budget
Reports. This would analyse the impact on individual, family and
household finances of Budget measures and other changes to the
welfare system."
8. Now, more than ever, such an analysis is badly
needed, with reductions in the welfare budget running alongside,
and potentially cancelling out, cuts in taxation for those on
low incomes. It would also enable a comparison between one earner
couples, two earner couples and lone parents.
NIC THRESHOLDS
9. The rise in the tax allowance is comparable
to (but not identical with) the rise in the NIC earnings threshold
in 2011-12, but from 2012-13 the NIC thresholds will be uprated
in line with CPI indexation only, while the basic personal allowance
for tax continues its higher-than-inflation uplifts towards the
£10,000 goal. While we welcome the rise in the tax allowance,
the interaction between it and a different earnings threshold
for NIC is yet another complexity in the system which will make
it difficult for people to work out accurately what they owe.
It is also at odds with the possible integration of the operation
of the two systems.
10. While we would favour gradually aligning
the earnings threshold for NICs with the personal tax allowance,
we do welcome the Government's intention to increase the lower
earnings limit in line with CPI only. The lower earnings limit
is the point on the earnings scale at which earners begin to build
up an entitlement to contributory benefits, and indexing it to
the CPI rather than the RPI will enable some 40,000[6]
more low earners will start to build up a contributions record.
HIGHER RATE
THRESHOLD AND
CHILD BENEFIT
11. The reductions in the basic rate limit for
income tax in both 2011-12 and 2012/13 will increase the number
of households losing their child benefit from January 2013, some
of whom may end up in the poorer half of the income distribution.
INCOME TAX
AND NIC REFORM
12. We welcome the forthcoming consultation on
reforms to integrate the operation of the tax and national insurance
systems, although it will be necessary to ensure that the value
low income people receive from their NI contributions is not lost
in the proposals.
13. It is important that the lower earnings limit
(LEL) (£102 a week in 2011-12) should keep its level, for
the reasons we give at paragraph 10 above. Any increases to the
LEL should continue to be indexed to CPI, even if (at the point
of reform) the NI thresholds are aligned upwards to match the
tax allowance.
14. The contributory principle is little more
than a spectre of how it was first envisaged, since the benefits
received through the state retirement pension and other contributory
benefits very rarely bear any relation to the level of contributions.
People with no contributions record who rely on means-tested benefits
often do better. Nevertheless it is a principle to which many
with long contributions records (older workers and retired people)
are attached, and abolishing it would give the impression that
the Government was abolishing any distinction between an entitlement
for which one had saved over the years (such as the state retirement
pension) and a means-tested "hand-out". There is a risk
that take-up would fall. Any proposed move away from the contributory
principle would need to be reviewed with care.
DEFINITION OF
"INCAPACITATED PERSON"
15. We very much welcome the announcement that
the Government will consult on modernising the language used to
define an incapacitated person for direct tax purposes.
16. The language used now is a hang-over from
the Victorian age and includes expressions such as "lunatic",
"idiot" and "insane person". Such language
is clearly offensive and no longer appropriate when describing
someone who needs an appointee or attorney to carry out such functions
as completing and signing their tax return for them and generally
dealing with the tax authorities on their behalf.
17. LITRG have been campaigning for a change
to this legislation for the last eight years, latterly in the
debates on what became Finance (No 3) Act 2010. We look forward
to the publication of the consultation document in May 2011.
ONLINE "MANDATION"
18. Finally we turn to a business tax issue which
will nevertheless adversely affect many individuals on low incomes.
19. We believe the Government should not go ahead
with plans to impose online filing on all the main business taxes
(corporation tax, income tax self-assessment, Class 2 NICs, PAYE
and VAT) without taking into account the needs of individuals
who find online filing difficult or impossible by reason of cost,
disability, or access.
20. Some individuals running small and very small
businesses have disabilities that prevent them from using computers
or the internet. Some businesses have profit margins that are
so small that the cost of computers, broadband and training, or
of appointing a professional agent to handle the online filing,
would have to be paid for by the proprietors in person. This they
may not be able to afford, if (as is often the case) they themselves
are on low incomes. Yet others are situated in areas where broadband
access is unreliable or unavailable.
21. Any move by the Government to compel online
filing in such cases is surely disproportionate, and risks driving
those people out of business altogether.
22. Besides, it is contrary to wider Government
policy. On 23 November 2010 the Minister for the Cabinet Office,
Francis Maude, made a statement on "Digital by Default",
in which he said that:
"This does not mean we will abandon groups that
are less likely to access the internet: we recognise that we cannot
leave anyone behind. Every single Government service must be available
to everyone - no matter if they are online or not."
23. We take this to mean that Government must
make no difference between the online community and those who,
often for good reason, remain unable to use a computer or the
internet.
Annex
Sharon is 23, has a daughter aged two. Her former
partner left her, and pays no maintenance. She works 32 hours
per week and has weekly childcare costs of £150. Her job
pays £10,000 per annum. Sharon lives in privately rented
accommodation, and her rent is £115 per week.
Sharon's tax, NIC, tax credits, housing benefit and
council tax benefit position in 2010-11 and 2011-12 is as follows:
| 2010-11
£
| 2011-12
£ | Gain/(loss)
£
|
| Income | 10,000.00 | 10,000.00
| — |
| Less tax | (705.00) | (505.00)
| |
| Less NIC | (470.80) |
(332.64) | |
| Net income | 8,824.20 | 9,162.36
| 338.16 |
| Tax credits | 12,300.75 |
11,758.72 | (542.03) |
| Housing benefit (weekly amount x 52) | 3,488.16
| 3,539.12 | 50.96 |
| Council tax benefit (weekly amount x 52) |
169.00 | 280.80 |
111.80 |
| Total | 24,782.11 |
24,741.00 | (41.11)
|
What is happening is that most of what Sharon gains by way of
increased tax allowance in 2011-12 she loses in housing benefit
and council tax benefit. Nevertheless, her housing benefit entitlement
and council tax benefit entitlement go up in 2011-12 because of
the substantial decrease in her working tax credit entitlement,
and working tax credit is counted as income for the purposes of
housing benefit and council tax benefit. The drop in working tax
credit is itself slightly offset by the increase in the child
element of child tax credit. The sum total of all these interactions
is that she is fractionally worse off in 2011-12 by a little under
£1 a week.
25 March 2011
5
Thirteenth Report of Session 2007-08, HC 326. Back
6
TIIN "CPI Indexation of National Insurance Contribution Rates,
Limits and Thresholds". Back
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