Tax warning for 18m families

Eighteen million families could soon be worse off unless the Government extends last week's income tax boon, according to the latest Institute of Financial Studies (IFS) study.

The 13 May announcement was a bigger giveaway than any Budget or Pre-Budget Report since 2001, said the IFS, when the outlook for public finances appeared much stronger.

However, six million individuals will pay more income tax this year despite the increase in the personal allowance, added the institute, although most of these people either live with a spouse or partner who gains more than they lose, or are fully compensated by increased benefits and tax credits.

But there are still 0.9 million families who will be worse off overall, with an average income (after taxes and benefits) of £11,800. More than two-thirds are in the poorest third of the population.

The IFS warned that in the absence of further tax policy changes, the next two years will see many families made worse off, and around 18 million households could be adversely affected in 2010-11 by an average of more than £150.

The institute noted that the Chancellor had promised that the Government's aim was 'to continue the same level of support for those on lower incomes' — which suggests the Treasury will try to ensure that many of this group will be compensated in future.

Given the Government's new-found reluctance to increase families' tax bills, said the IFS, it seems unlikely that ministers will wish to inflict more losses than they have to on the 13 million, mostly middle-income, families who did not lose out in the Budget 2007 reforms, but who have nevertheless gained from the increase in the personal allowance.

But retaining the higher personal allowance would require the Government to find around an extra £2.7 billion a year, according to the new research.

IFS director Robert Chote commented: 'By announcing a big one-off increase in the personal income tax allowance, Alistair Darling has not only created millions of winners this year, he has created millions of potential losers next year.

'On the evidence of its recent decisions, the Government may well be afraid to take their gains away from them.

'If public sector borrowing ends up permanently higher as a result, it will further undermine the credibility of the Government's management of the public finances and increase the probability of future tax increases or spending cuts — perhaps soon after the next General Election.'

Categories: News , Income Tax