Personal allowance increase welcome, but what about those on the lowest incomes?
THE Chancellor announced that the
personal allowance will increase from ₤11,500 to ₤11,850 from 6 April 2018. For
many, this is a welcome announcement as it will mean they have more cash in
their pockets, however it does little to help those on the lowest incomes.
Those already earning under the current personal allowance of ₤11,500 will gain
nothing from this change. Those earning above ₤11,500 may benefit, but by how
much depends on whether they receive Tax Credits or other means tested benefits
such as Universal Credits or housing benefit.
Anne Fairpo, Chair of LITRG said:- "Increases to the personal allowance
are often cited as helping those on the lowest incomes whereas in fact those on
the lowest incomes either don't benefit at all or benefit by a lower amount than
those with incomes higher up the scale.
Entitlement to Tax Credits is based on gross income, so Tax credit claimants who
have income above ₤11,500 should see the full benefit of the increase in
personal allowance, making them ₤70 a year better off. However, those with
incomes above ₤11,500 who are receiving Universal Credits will most likely see a
reduction in their benefit. This is because Universal Credits, like other means
tested benefits, is based on net income (after Tax and National Insurance have
been deducted). As the amount of Tax they pay reduces, their Universal Credits
award also reduces. Instead of gaining ₤70 a year from the increased personal
allowance, they will only gain overall by ₤25.90 as their Universal Credits will
be reduced by ₤44.10. In other words, they only gain 37% of the benefit of any
increase in the personal allowance.
If the Government want to help those on the very lowest incomes, increasing work
allowances in Universal Credits and increasing the 1st income threshold in
working Tax Credit would be more beneficial. The work allowances in Universal
Credits were cut substantially (and in some cases removed) in 2016 and the first
income threshold in Tax Credits has been frozen for some time. These thresholds
are the amounts that claimants can earn before their benefits start to be
withdrawn. Increasing them would help those on the lowest incomes who currently
see no benefit from any increase in the personal allowance, and provide a
valuable work incentive.
It is also time the Government looked at increases to the National Insurance
primary threshold which has lagged behind the personal allowance for some time."