Tory plans for personal tax breaks are regressive


6:41 pm - December 18th 2009

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contribution by Thomas Byrne

Recently outlined proposals by Tories to allow women who do not work to transfer their personal tax allowance to their husband are extremely flawed.

I agree with the principle being put forward by Iain Duncan Smith, but the means are wrong. Marriage tax breaks are much more important for the poor, yet this policy benefits the rich. And instead of changing tax boundaries, it’s tinkering with a system of complex allowances.

It is unlikely that people who can’t afford accountants will even know about this, let alone know how to transfer their personal allowance across.

Lets work out the maximum saving. This will be where one partner earns just under £50k and the other doesn’t work. Its £2414.

The current personal allowance is £6,035. Basic rate (20%) applies from £0-37,400. Higher rate (40%) over £37,400.

Maximum saving will be where one partner (lets say the woman) does not work and the other (lets say the man) is able to use all of the woman’s personal allowance to reduce his liability at the higher rate. This will occur where the man earns at least 37400+6035+6035= £49470 before tax. That puts him firmly in the top 10% of earners. This will result in a saving of 40%*6035 = 2414

Let’s see what happens as we decrease incomes. If the earning partner earns £43k and the other does not work, the saving is £1212. This is a flat saving until the earning partner’s income drops to below £12070.

If the man earns less than £49470, then some of his wife’s personal allowance will be off-setting tax liability at the basic rate. If the man earns 37400+6035= £43435; then his taxed income is 43435-6035 = £37400; and all of his wife’s personal allowance will be off-setting tax liability at the basic rate, resulting in a saving of 20%*6035 = £1212. As you can see, the saving increases steeply as the man’s earnings approach £50k.

Let’s see what happens if both partners work. If one partner earns at least £6035, and the other does not earn more than £43435, there won’t be any saving at all.

Most families won’t save a single penny. Working women already use their personal allowance. Lets take a fairly average family. The man earns the average salary, £31,759 (BBC news). After his allowance his taxed income is £25734. The woman is a working mother and works part-time earning £15000. There is no saving whatsoever from transferring the personal allowance across.

This policy completely fails to target the kind of people it is supposed to target – it isn’t rich families suffering from the nuclear family breaking down. This policy only helps where one parent doesn’t need to work or where the breadwinner is earning at least £43k – the top 10% of earners.

It can be seen as a back-door way to take from the poor and give to the rich, and if we are be to taken seriously as the progressive force within Parliament we need to help the poor, not penalise them through well intentioned, but misguided schemes such as this. We need real plans to help poor families.

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Thomas describes himself as a ‘Pro Eu Half-arsed Libertarian’ and blogs at Byrne Tofferings

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Reader comments


“yet this policy benefits the rich”

So you mean the tories have not changed at all?

Well there is a shock.

It should be noted of course that it isn’t party policy as of yet. Just one of IDS’s silly suggestions which deserves to be chucked out.

#2

Really? I thought marriage allowances were Tory policy.

As far as I’m aware there’s plans to put marriage into the tax system, and this was one of the measures. (If this is official party policy link pls!)

I can’t really get my head round the idea that it’s possible to afford a family without both people working.

And does this work the other way around or is a female breadwinner completely inconceivable (or is that just the way you’ve written this)?

I’d be surprised if it didn’t go both ways Kate, I just did this example as thats how its been mainly reported.

This policy completely fails to target the kind of people it is supposed to target

Really? This policy seems to me to target families where the either the wife or husband wants to be a full-time parent.

I agree there should be some measure in order to ensure those who earn in the 40% band don’t doubly benefit from this change (£6,035 x 20% ought to be the maximum saving – and you could get this by adjusting the rate at which the 40% band kicks in).

If you make this adjustment then it actually becomes a progressive change – take for example a (one working parent) family where the one salary is ~£32,000. The current post-tax income is ~£24,000. The ~£1,200 tax break gives them an extra 5% on post-tax income. A family where the single salary is ~£20,000 would see their post-tax income rise by just over 7.5%, from ~£15,725 to ~£16,925.

Decent blog but why use the mean average?

“Another way of measuring it is “median” gross annual earnings. According to ASHE, this was the more modest figure of £20,801, across all employee jobs. If you are earning that sum a year, you are “Mr or Mrs [or Ms] Mid-Point” – precisely half the surveyed working population earns less than you and half more. For just full-time employees, the median rises to £25,123.”

That’s considerably lower.

And of course, the poorest in society often work part time (as they are lone parents, and this is necessary to raise children – yes, I know that tax credits and CB change things here, but still).

But just to reiterate: median income is ONS-estimated at £20,801. 50% of the population make less than that.

I think, when that’s recalled and added to the analysis in the OP, tory’s plan’s failure to help the poor really does stand out.

8 – Paul, what failure? Did I not just show that, providing they put something in that evens out the ‘double gain’ that people who pay 40% tax will see, single worker families such that these tax changes are aimed at will benefit progressively from them (as above, the £20,000 earner sees a 7.5% increase in post-tax income compared to the £32,000 earner seeing only a 5% rise). Now, if they don’t put the 40% band correction in then I agree with you that it helps the rich rather than the poor, but as we don’t know the full detail of the proposal you can’t make too many assumptions.

All these figures have to be viewed as a percentage, otherwise the old saying about the poor paying more tax is completely false (I’d love someone to argue that someone earning £15,000 pays more tax in cash terms than someone earning £50,000).

Mark,

You could restrict a carried-across personal allowance so that it only offsets basic tax liability at 20%, but it still leaves the problem that any family where one partner works, even part-time, won’t benefit at all. I think this covers most families, certainly most poorer families.

But the point of this tax break isn’t to help two-working parent families – so the fact that it doesn’t should be no surprise to anyone.

The logic of it is “if you want to stay at home with your children rather than work, we will support you”. Of course you can disagree on whether that’s what we ought to do, but the idea is to allow one-working parent families to take advantage of the £12,000-combined personal allowance that two-working parent families get. Is it really a fair tax system that taxes two families with the same income different amounts just because one family has only one worker?


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  1. Nicolas Redfern

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  2. Liberal Conspiracy

    :: Tory plans for personal tax breaks are regressive http://bit.ly/5MApc2

  3. irene rukerebuka

    RT @libcon :: Tory plans for personal tax breaks are regressive http://bit.ly/5MApc2

  4. Thomas Byrne

    RT @libcon: :: Tory plans for personal tax breaks are regressive http://bit.ly/5MApc2

  5. Elsewhere – Liberal Conspiracy – Marriage Tax Breaks : ByrneTofferings

    […] Party shouldn’t take on IDS’s plans to transfer the personal allowance is up at Libcon here. Originally done […]





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