Sweeping reforms to the tax system in April, involving £14bn of tax cuts and tax credit increases, are set to benefit households at the top and bottom of the income distribution, according to the Institute for Fiscal Studies, the independent think- tank.
In the biggest set of changes implemented in any year under Labour, reforms to income tax and national insurance will lead to a slight increase in disposable income for wealthier householders. The changes to tax credits will boost disposable incomes for the poorest 30 per cent of households, while those in the middle will see little change.
April’s reforms would not materially change the “strongly progressive” nature of Labour’s tax and benefit reforms since 1997, which had particularly helped lower-income families with children, and pensioners, the IFS said.
Tax changes since 1997, including those due in April, have increased the income of the poorest 10th of the population by 12.4 per cent (£1,300) a year and reduced those at the top by 5.5 per cent (£4,200). But despite higher taxes, a household in the middle of the top 10th of the income distribution has seen an increase in real post-tax income of about 20 per cent between 1997 and 2006.
April’s reforms will embrace capital gains tax, corporation tax, income tax, inheritance tax, national insurance contributions, business rates and the tax credit system. They include the abolition of the 10p starting rate of income tax, the reduction of the basic rate from 22p to 20p in the pound and a rise in the upper earnings level for national insurance contributions.
The changes, which were announced in March and October last year, will increase gross taxes by £13.5bn in 2008-09, offset by reductions and tax credit increases of £14bn.
Overall, households will gain almost £2.2bn, largely offset by increases in capital gains tax and corporation tax, particularly for smaller companies. Taking all taxes into account, the average household will be 35p better off a week.
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