Tony Hazell  

Families struggling with tax and benefit changes

Tony Hazell

Tony Hazell

As celebrities and multi-nationals continue to dodge tax, those on far more modest incomes have gradually found themselves dragged into higher tax brackets over the past few years.

This is something chancellor Philip Hammond could address in the coming Budget. But middle Britain’s taxpayers are now seen as the cash cow that must be milked.

The government’s failure to raise key thresholds in line with inflation has created a tax creep that has engulfed millions.

Article continues after advert

Take the £100,000 threshold for the erosion of the personal allowance. This was set at £100,000 when introduced in April 2010 by then-chancellor Alistair Darling. It has stayed there ever since. Had it been increased with the CPI, the starting threshold would now stand closer to £116,000.

HMRC estimates that 893,000 people will be affected this tax year. That is a chunky 3 per cent of all taxpayers. In 2015 for figures was estimated to be 791,000 accountants, Deloitte told me.

The impact on these people has been increased by the raising of the personal allowance to £11,500. Now those in a bracket from £100,001 to £123,000 are affected by a marginal tax rate of 62 per cent if you include National Insurance. 

But the greater travesty has come with child benefit withdrawal. The £50,000 level was set in January 2013. Above this, 1 per cent of child benefit is withdrawn for every £100 earned until at £60,000 it is gone altogether.

It can create ludicrously high marginal tax rates for families that can hardly be counted as super wealthy. For example, Deloitte's illustrations show that a family with one child would lose 52.56 per cent tax on this chunk of income while one with four children would lose 73.46 per cent.

The Institute for Fiscal Studies estimated that about 1.1m families would be affected when the measure was introduced in 2013.

So far the £50,000 threshold has not been indexed with inflation. If it had been raised with CPI it might now be closer to £52,000.

The IFS has warned the number losing the benefit could increase by 50 per cent in five years and double in 10 years if the threshold remains unchanged. 

Those on the threshold of paying higher rate tax have also suffered through lack of indexation. As a result, the number paying 40 per cent tax has doubled over the past 20 years from 2.1m in 1997.98 to 4.2m today.

Yes, through financial planning and particularly pensions, the effects can be mitigated. But for some this is just not financially feasible.

This all helps to explain why, despite the tax dodgers, receipts rose by 17 per cent to £177bn in the five years to April 2017 even though the personal allowance has more than doubled over the past 10 years from £5,225 in 2007/08 to £11,500 today.

Protect consumers from exploitation

Where does the responsibility of a regulator start and stop when it comes to protecting consumers?

What about the responsibilities of firms and regulator in identifying and protecting vulnerable consumers? And what about the responsibilities of consumers to make reasonable decisions?