UK Politics

Tax and benefit changes: Row over financial impact

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Media captionDanny Alexander: "As a government, we've taken some incredibly difficult decisions to deal with the enormous mess Labour made of the economy"

Tax and benefit changes affecting millions of people have come into force amid a political row over their impact.

Labour are arguing that a child benefit freeze, tax credit changes and the way benefits are linked to inflation will leave many families worse off.

The Treasury said there would be "some losers" but the poorest 80% of households would, on average, be better off with some taken out of income tax.

The changes have come into effect as the new tax year starts.

The parties are at odds over who will lose out the most - with the government denying Labour claims that the changes are "regressive", hitting the poorest hardest.

'Black Wednesday'

Labour say the benefit cuts will make it a "Black Wednesday" for families across the UK but ministers say the measures are necessary to tackle the estimated £146bn budget deficit and the opposition would also have had to increase tax and trim benefits.

Among the changes to come into effect on Wednesday are a 1% rise in employees' National Insurance contributions - a measure first announced by Labour in December 2009 but which the government decided not to reverse.

Credit Action, a financial education charity, has calculated they will leave households £200 a year worse off.

Labour are focusing on the changes to the way benefits are linked to inflation announced in last month's Budget. From now on, they will be uprated in line with the consumer price index, rather than the retail price index - which is usually higher.

And they have flagged up changes to working tax credits, child tax credit and the freezing of child benefit for three years, announced by coalition last year.

'Dangerous cocktail'

Shadow chancellor Ed Balls said cuts to the amount parents could claim in childcare costs through the working tax credit alone would leave some families worse off by up to £1,560 a year.

He told BBC Radio 4's Today programme the changes would hit the poorest the hardest and it was a "very, very tough day for families".

"If we're all in this together, why is it that women rather than men, families with children, and part-time working women losing their childcare support are being hit the hardest?," he said.

He also said the economy was being hit hard with a "dangerous cocktail" of higher food and fuel prices, large-scale spending cuts and falling living standards.

Other changes coming into force include a £1,000 rise in the threshold at which people start paying income tax to £7,475, which means about 500,000 people will no longer pay tax on their earnings, according to the Institute of Fiscal Studies.

There is also a freeze on the inheritance tax threshold, an extra 5% on stamp duty for homes worth more than £1m and restrictions on tax relief on pension contributions for those on more than £150,000 a year.

Impact on families

The Low Incomes Tax Reform Group said those earning more than £40,000 would be hit most by the rise in national insurance but those on less than £20,000 would not be affected.

Among other organisations reacting to the changes, the Child Poverty Action Group said it was a bad day for low-income working families.

"If you have a new child tomorrow - a second child - you could be about £15,000 a year worse off than somebody who claimed yesterday," chief executive Alison Garnham said.

She cited a combination of factors including the loss of the baby element of tax credits, health in pregnancy grants, the Surestart maternity grant, and the increased rate at which tax credits were withdrawn after earning £6,000.

'Helping people'

Ministers say that delaying any tax and benefit changes would only force the government to make bigger cuts later, affecting the poorest in society.

Chief Secretary to the Treasury Danny Alexander said they were seeking to concentrate help on "the most in need" and that the top 10% of households would suffer the most as they do not gain from the rise in personal allowances and would pay the most increased NI contributions.

Two-earner households on a combined income of £170,000 would be £32 a week worse off but a couple earning £25,000 a year with two children would be £12 a week better off, he said.

"For families with children they will benefit from the income tax cut, they will benefit, particularly those on low incomes, from the substantial increase in the child tax credit we are putting through," he told the BBC.

"Of course there are some losers in this. What we are trying to ensure is that those with the broadest shoulders bare the greatest burden and we do what we can to help people under financial pressure.

"By cutting income tax, particularly focused those on lower earners, we are helping people to keep a bit more of the money they are working very hard for."

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