Taxman to take extra £750 from families this year

Published on Tuesday 5 April 2011 15:46

THE average Scottish household will be £750 worse off by the end of the financial year when sweeping tax and benefits changes which come into force today are combined with January's VAT rise, financial analysts have warned.

Increases in National Insurance, together with changes to the tax and benefits regime, will see the majority of families worse off. In the worst cases, some couples with children could see their income cut by up to 2,600 this year.

Experts warned the changes would drive thousands of Scots deeper into debt and leave many at risk of bankruptcy or facing having their homes repossessed.

Today sees many of Chancellor George Osborne's Budget proposals take effect, a financial milestone that has been dubbed "Worse Off Wednesday" by analysts.

The sweeping changes will hit middle earners with children and result in about 80,000 more Scots being moved into the 40 per cent tax band.

A National Insurance hike, a child benefit freeze and a fall in the income limit for child tax credit from 50,000 to 40,000 are among today's changes. For the average Scottish family with an income of 30,000 after tax, they will result directly in an income drop of 200 this year. That figure rises to 750 when the effects of January's VAT rise to 20 per cent is factored into their budgets.

Analysis by the Institute for Fiscal Studies (IFS) predicts that figure rising to 1,500 for the average UK household by the end of the Westminster parliamentary term in 2015.

The change in child benefits will hit some families harder than others. IFS analysts predicted that, from today, a one-earner couple with children can, on average, expect their household income to fall by more than 4 per cent, while a two-earner couple without children will see their income decrease by 3 per cent.

Some scenarios drawn up by the TUC forecast that a couple with a joint income of 40,000, with two young children and paying 400 a week in childcare, could lose 2,600 by next April.

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"I expect that's possible, but it is probably a worst-case scenario," said James Browne, a senior economist at the IFS.

"But if you take into account all the changes that we have had since January, virtually everybody will be worse off."

According to the UK government, some people will benefit, including those being taken out of income tax as the personal allowance goes up by 1,000 to 7,475 for those under 65 and from 9,640 to 10,090 for those aged 75 and over.

But independent financial experts said the reality was that middle and higher earners could expect their incomes to shrink.

Derek Allen, director of tax at the Institute of Chartered Accountants Scotland, said: "This is really going to bite.

"The bad news is coming through with the increase in National Insurance and the reduction in the higher-rate threshold.People are going to find their take-home pay reduced while the cost of living rises. It is going to be a tough year.

"The reality is that we are all going to be paying more tax."

From today, National Insurance contributions rise by 1 per cent to 12 per cent, while changes to tax credits will mean some families losing out by more than 500. The earnings threshold for the higher rate of income tax is being cut from 43,875 to 42,475, dragging an extra 750,000 people into the higher bracket - 80,000 of them Scots.

Child benefit is being frozen at 20.30 a week for the eldest or only child and 13.40 for any other children. The income limit for child tax credit falls from 50,000 to 40,000, while the element of tax credit for babies under one (545) is being stopped.

Housing charities have warned that some of the government's cuts that have come into force, including reductions to housing benefit, will make it harder for some Scots to stay in their homes.One widely predicted consequence of the squeeze is a fresh jump in insolvencies among middle-income earners. It was revealed last week that Scottish towns occupy six of the top ten places in the UK personal bankruptcies league.

Glenrothes, Kirkcaldy and Livingston have the biggest concentration of insolvencies in the UK and the problem is being driven by an alarming rise of uncontrollable debts among middle class families. Middle-aged, middle-class and skilled working class employees accounted for the biggest rise in bankruptcies across the UK last year and experts predict that trend will deepen as today's measures take effect.

Bryan Jackson, corporate recovery partner at accountant PKF, noted that debt problems were already rising up the income scale, with a growing number of affluent Scots in financial difficulty.

Many had expected continued house-price inflation and easily available credit to keep them out of choppy waters. "This had worked in the past but, unfortunately, is not going to work this time," Mr Jackson said. "With property prices static or even falling, there are tens of thousands of individuals with little or no equity in their homes and large unsecured debts."

Graeme Brown, director of the housing and homelessness charity Shelter Scotland, said: "These cuts come against a background of rising homelessness, public sector job cuts and people struggling with the cost of living. More people are going to find it even harder to stay in their homes or find an affordable place to live, and politicians seem to have no plan for dealing with the impact."

Scottish Labour leader Iain Gray said: "These Tory plans hit every Scottish family in the pocket, but what appals so many Scots is that the Lib Dems are going along with it all.

"This is the true cost of a Tory government - an unprecedented assault on jobs and living standards. Parents with children will see substantial cuts to their incomes. The increase in VAT and the child benefit freeze will hit every family in Scotland and leave many families struggling."

SNP work and pensions spokeswoman Eilidh Whiteford said: "The benefits system badly needs reform, but this must be undertaken with care. While supporting benefit reform, genuinely vulnerable individuals must not become an easy target for Conservative and Liberal cuts."

TUC general secretary Brendan Barber said: "With wages failing to keep up with the cost of living and the VAT rise biting into household budgets, these tax credit cuts could not have come at a worse time for families.

"Working families are bearing the brunt of government austerity measures."Scottish Secretary Michael Moore disputed the IFS figures, claiming that 80 per cent of households would be better off, and pointing in particular to the government's decision to raise the income tax threshold by 1,000.

He said: "As a result of the changes coming into force tomorrow, around 80 per cent of households will be better off.

"Over two million Scots will receive an income tax cut and 71,000 low-paid Scots will come out of income tax altogether."