LITRG stresses need to consider benefits impacts of tax and NIC changes

Today the Government announced, in the Growth Plan 2022¹, that they intend to reduce the UK basic rate of income tax to 19% (from its current 20%) from April 2023. This is in addition to yesterday’s announcement that they will reduce national insurance contribution rates from 6 November.² However, LITRG is concerned that behind the headlines, people on lower incomes may find it difficult to understand how much better off they will be as a result. The group recommends that when devising future strategy relating to tax simplification the Government ensures that tax and welfare benefits interactions are considered.

Kelly Sizer, Senior Manager for LITRG, said:

“The Chancellor today announced the abolition of the Office of Tax Simplification,³ promising instead to ‘set a mandate to HM Treasury and HMRC to focus on simplifying the tax code’. One point we wish to highlight here is that, for those on low incomes, it is impossible to consider simplification by looking at tax alone.⁴ It is essential to think about how the tax and welfare benefits systems interact. This means consulting with stakeholders who are expert in this field and ensuring that thinking is joined up with the Department for Work and Pensions.

“While yesterday’s and today’s headline announcements to reduce NIC and income tax burdens on individuals will be welcomed by many, those on lower incomes claiming welfare benefits may not see the full benefit of tax and NIC savings.

“The main in-work benefit, universal credit (UC), is calculated based upon a claimant’s income net of tax and NIC. This means that if a claimant’s tax or NIC liability increases, the UC award may go up; but equally a decrease in tax or NIC liability means the UC award may go down.

“So for example, if NIC and income tax reductions meant that someone had an extra £20 in their pay packet, if they were claiming UC, that extra amount of earnings would be factored into the calculation of their award. If tapered at 55%, it would mean that they were better off overall by only £9.

“Interactions such as this and the consequent complexities for individuals need to be considered when devising future tax policy.⁵”