Richest and poorest have lost most in tax and benefit changes, says report

Low-income households with children and the very rich have lost the most as a percentage of income from the coalition government’s tax and benefit changes, according to a report from the Institute for Fiscal Studies.

The report says middle to higher income working age households have escaped “remarkably unscathed on average” while those without children have actually gained from the changes.

It focuses on tax and benefits changes made after the 2010 election. It says households have lost an average of £489 a year from these changes. Including tax rises introduced in April 2010 increases this average loss to £810 per year.

The report says this average loss conceals considerable variation between households at different income levels and between different types of household. For instance, low-income households with children lost the most as a percentage of their income from changes implemented by the coalition mainly because of cuts to means-tested benefits and tax credits. The richest tenth of households also lost out significantly.

Middle-income, working-age households without children have gained from the coalition’s changes, mainly due to the increase in the income tax personal allowance. However, for those with children the loss of tax credits and child benefits has more than offset gains from the personal allowance. Households in London have lost more on average than households in other parts of the UK. This is both because many of the highest-income households are in London, and because London’s low rates of owner occupation and high rents mean that households in London are
particularly affected by cuts to housing benefit, says the report.

The report says changes to the tax and benefit system don’t just affect incomes but also work incentives. By cutting benefits for non-working families and increasing the personal allowance, the coalition has “significantly strengthened” financial incentives to work on average for most groups, it states. However, it adds: “Cuts to in-work benefits have undermined this effect for lone parents and people with children who have a partner who is not in paid work.”

James Browne, a senior research economist at IFS and a co-author of the report, said: “How much different households gain or lose from tax and benefit reforms depend partly on whether you look only at those introduced by the coalition or include all changes that have been introduced since the start of the fiscal consolidation in 2010. It also matters how you define a ‘reform’. But whichever way you cut it, low-income households with children and the very richest households have lost out significantly from the changes as a percentage of their incomes. Increases in the tax free personal allowance have played an important role in protecting middle-income working-age households meaning that those without children have actually gained overall.”

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