Child benefit cuts will hit not only affluent but low-income families as well

The Government's squeeze on child benefit will hit families on low to middle incomes as well as the better off, according to a new analysis for The Independent.

The research reveals that 36,000 working households in the bottom half of the income scale will lose their child benefit in January 2013, when it will be axed for families with a taxpayer on the higher 40p in the pound rate. They will lose an average of £2,160 a year in 2013-14 – between 4 and 5 per cent of their household income.

Ministers’ claims that their tax and benefit changes are “progressive” are called into question by the new study, which found that the changes mean a family on £45,000 a year would lose a bigger proportion of their income (6.9 per cent) than one with a household income of £60,000 (5.2 per cent) between 2010-11 and 2012-13.

By the following year, the family on £45,000 will lose £2,939 (8.2 per cent of their 2010-11 income), while the family on £60,000 will lose only £2,421 (5.5 per cent).

When George Osborne announced the squeeze on child benefit at last autumn’s Conservative Party conference, it was portrayed as hitting the better off and an example of the Chancellor’s “We’re all in it together” mantra as the whole nation joined forces to reduce the huge public deficit.

Mr Osborne hoped that the move would give the Government political cover to cut the welfare budget – spent overwhelmingly on the poorest in society. Describing the child benefit shake-up as “tough but fair”, the Chancellor said then: “It is very difficult to justify taxing people on low incomes to pay for the child benefit of those earning so much more than them.”

The new study was carried out by the Resolution Foundation, an independent thinktank set up to improve the lives of low to middle earners. It defines this group as being on below median household income. For a couple with no children this means between £12,000 and £30,000; and for a couple with three children, between £30,000 and £48,000.

Its analysis of the Government’s tax and benefit changes also reveals that the pain of the austerity measures has barely begun for millions of families. The three-year freeze on child benefit and cuts in tax credits which started this month will total £6.9bn by 2015-16. But only £0.7bn (10 per cent) will take effect in the current financial year, with a further £2.4bn (35 per cent) next year and the biggest slice £2.9bn (42 per cent) in 2013-14.

With wages likely to rise more slowly than inflation, politicians in all parties believe that falling living standards are likely to be a major issue at the next general election, due in 2015. Ed Miliband has already highlighted the plight of the “squeezed middle” as he tries to rebuild Labour’s economic credentials.

The impact of the child benefit cuts on low and middle income earners will worry Liberal Democrat and Tory MPs and could lead to pressure on Mr Osborne to bring in compensatory measures to soften the blow when it is axed for higher rate taxpayers. According to the study, it would cost him £77m to reverse the change for the 36,000 low to middle earning families, who have a total of 92,000 children between them.

The new analysis includes bad news for the Liberal Democrats, who have trumpeted the Coalition’s decision to raise personal tax allowances to take low paid people out of the tax net – a key pledge made by Nick Clegg’s party at last year’s general election.

According to the foundation, the higher tax allowances will be “nothing like enough to make a dent in the losses from child benefit”.

The rise which took effect this month will be worth an average of £28 a year for a low to middle income family. The further increase in allowances in a year’s time, the foundation calculates, will also benefit people higher up the income ladder because it will not be restricted to basic rate taxpayers, as this year’s rise was.

Although another 60,000 low to middle earners will escape the tax net next April, the remaining 6.5m taxpayers will all benefit from a £48 tax cut.

The study estimates that two thirds of the £1bn cost of next year’s rise in tax allowances will benefit people in the top half of the working age income distribution.

Matthew Whittaker, senior economist at the Resolution Foundation, said yesterday: “Many low to middle income families with children have already been hit by reductions in their tax credits which are greater than the benefit from the increased personal tax allowance. To then take away child benefit from families who are already in the bottom half of the income distribution will only ramp up the increasing financial pressure these working families are under.”

Mr Osborne’s Budget decision to cut fuel duty by 1p a litre may have limited impact, the foundation concludes. Although his changes to fuel duty are progressive, the benefit will be reduced by the rise in VAT to 20 per cent in January. Low-to-middle income households will gain about £47 this year – 37 per cent of the total cost-but the figure falls to about £15 when the VAT increase is taken into account.

Low to middle earners will be about £4 a year worse off as a result of a switch to raising other tax allowances in line with the consumer price index rather than the retail price index. “Of the £105m savings anticipated by the Government in the first year, around 30 per cent is set to be generated by low-to-middle earner households,” says the foundation.

The Chancellor's regressive impact

Family on £45,000

One-earner household, couple with three children. Tax and benefit changes in next two years – including loss of child tax credit – will reduce the family's income in real terms by £653 in 2011-12 and a further £789 in the next year. Will lose child benefit from January 2013, making it £818 a year worse off in 2012-13 and a further £1,600 poorer the following year.

Overall the family will be £1,645 (4.6 per cent) poorer in 2011-12 than the previous year and £2,478 (6.9 per cent) worse off in 2012-13 than in 2010-11.

Family on £60,000

One-earner household, couple with three children. Does not qualify for child tax credit. Tax and benefit changes over next two years will reduce the family's income by £119 in 2011-12 and a further £783 the following year. Will lose child benefit from January 2013, making it £818 worse off in 2012-13 and a further £1,600 poorer the following year.

Overall the family will be £1,442 (3.3 per cent) poorer in 2011-12 than the previous year and £2,283 (5.2 per cent) worse off in 2012-13 than in 2010-11.

Source: Resolution Foundation