Jeff Salway: Poorest hit hardest in debt burden method

THE word ahead of the coalition's emergency Budget was that the wealthiest would shoulder the bulk of the burden.

But the government's own figures reveal a barbell shape in the Budget's impact on households, with those at opposite ends of the income spectrum bearing more than their share of the pain.

High earners have been spared the worst largely because of measures already in place, most notably the new 50 per cent rate of income tax for high earners in April and the loss of personal allowances for those earning more than 100,000.

When viewed independently from previous measures, however, low and middle income families are the biggest losers in Chancellor George Osborne's first Budget. The richest 10 per cent of households will see the biggest tax increases, but the poorest 10 per cent will also lose out, by around 200 a year, with this group getting less state assistance and those out of work not benefiting from the higher income tax threshold.

Mr Osborne's flagship policy was a rise in the level of earnings at which income tax becomes payable to 7,475, up 1,000 from the current level. The new threshold will come into force next year and benefit low and middle earners in employment, lifting nearly 900,000 people out of income tax entirely and saving some 23 million basic rate taxpayers up to 170 in tax.

However, some will see their savings from the higher personal allowance at least partially wiped out by next year's planned increase in national insurance contributions (NICs).

Those earning more than 20,000 a year will see NICs increase from 11 to 12 per cent next April, while the upper earnings limit will be cut. The income tax threshold for higher earners will be frozen until April 2014, as previously announced, a move that is set to drag more people into the higher rate net.

Yesterday's other centrepiece announcement was a hike in VAT from 17.5 to 20 per cent next January that will have the biggest impact on the tightest household budgets. The average shopping basket for items purchased over the last week will increase by 45 a year for a family of four (excluding drink), according to the Association of Certified Chartered Accountants (ACCA).

It also estimated that the cost of filling up the average car – provided there are no further rises in fuel duty – will increase by 1.40 each refill, based on the average size of a fuel tank.

Chas Roy-Chowdhury, head of taxation at the ACCA, said that while tight finances made a move on VAT inevitable, a rise to 20 per cent could spark inflation.

"While VAT rises hit the poorest hardest, the government will probably try to argue that the Budget has protected those on low-incomes against the full impact with a rise in the personal allowance," he said.

"However, this VAT rise will hit pensioners and those who have to rely on benefits, as they will not gain from other tax breaks announced today."

Mike McCusker, partner at PricewaterhouseCoopers Scotland, agreed. He said: "Everyone is going to lose out in VAT but it especially affects consumers at a lower income level because it takes a higher proportion of their disposable income."

While the VAT hike will not affect most food costs, the typical weekly grocery shop will still be more expensive because not all products are exempt. Jonny Steel, of mySupermarket.co.uk, explained that there are discrepancies between foods that qualify for VAT making it hard to predict where the increase will hit shoppers most.

Grocery staples included most confectionery, drinks and snacks, are not exempt from VAT, while non-food items such as toothpaste and cleaning products will all also be affected.

"By making some smart decisions, consumers can avoid paying VAT on a lot of convenience foods," said Steel.

For many families the increased VAT cost will be exacerbated by the loss of child benefits and tax credits. The health in pregnancy grant, which currently pays out 190 to help families ahead of the birth of their baby will be abolished, while the 500 Sure Start maternity grant for those on lower incomes is to be limited to the first child.

Households with a combined income of more than 40,000 will see their tax credits reduced, although those with income below that will see the child element increased by 150.

Ann Robinson, consumer policy director at uSwitch.com, said: "These cuts will place family finances under even more pressure at a vulnerable time. The high cost of living coupled with the costs of running a household means that many parents today need two incomes to just get by. The decisions the government has taken today will make it a lot harder for a mother to have the choice of staying at home."

When yesterday's Budget is viewed in the context of measures announced by the previous government, however, there are precious few winners. The clobbering dished out to higher earners by the Labour government has been partially rebalanced by decisions that will hurt some of the lowest earners.

Roy-Chowdhury at the ACCA said: "With NIC rises, the retention of the 50 per cent income tax rate, and other tax issues, next year it's likely the UK will end up with an effective top rate of tax of 52 per cent. This puts the UK well out of step with some of its closest competitors."