Cost of living crisis hitting tax paying families

Inflation is rising faster than today’s families have experienced for very many years. The BBC’s Today programme on 16th February featured a family in Wythenshawe with a mortgage who said they were not in poverty but were being hit by the cost of living crisis. To listen to the interview click here. The interview starts at 2:36.36.

One of the problems families like this face is that they are taxed as if they are well off when this is not the case. They pay the same amount of income tax as people without children even though people are much better off if they do not have children.

The Office of National Statistics say that, in order to be as well off, a couple with two children needs almost two and a half times as much disposable income as a single person without children with the same earnings. However their income tax will be more or less the same.  A tax system which reflected how well off people are would take this into account. In Germany, France and the US families close to poverty pay little or no income tax.

The father worked in an ice cream factory. The mother was a carer and volunteered in a food bank. They were not technically in poverty, This was because their household income was more than 60% of the median. If the family’s combined income was £40,000 and their housing costs were £160 per week they would be in the 4th decile  i.e they would be in the least well off 40% of the population. If their incomes were split 60:40, they would be paying a total of £2,967 in income tax. They would be getting child benefit and about £50 per week in universal credit. Their marginal rate, ie the amount of tax plus the loss of benefits for every £ of increased earnings is 69%, rising to 70% in April.

A two income couple without children pays the same amount of income tax and with the same housing costs would be in the 6th decile - ie in the top half of the population.

With a marginal rate of 69% the couple with children would need to earn an extra £10,000 to be as well off as the couple without children. They would then be paying almost £5,000 in tax.

The income tax system does not take any account of the family or the costs which that inevitably incurs.