Lower income families look to be the most affected between now and 2020, with the poorest third likely to see incomes dropAmongst other things, Philip Hammond announced in last week’s Autumn Statement that the rules will be tightened regarding employee benefits and pay growth is not looking as positive as we had hoped.
Hammond stressed that the salary sacrifice system is “unfair”, and so from April 2017 the tax benefits of using these schemes will no longer be in play.
At present, employees save on their tax by paying for these benefits before tax is deducted, while employers save on paying National Insurance on the sacrificed wages.
Mr Hammond did disclose that pensions savings and advice, ultra-low emission cars, childcare and the cycle-to-work scheme will be excluded from this change.
The change is due to the Treasury’s concerns that the growth of these schemes is costing too much in lost national insurance contributions and income tax.
Scrapping this scheme will cost employees and employers £85m in 2017/18, rising to an additional £260m by 2020/21. Over the next six years the move will raise just over £1bn in additional tax.
The outlook for wages is “dreadful” with pay growth looking to be stagnant for more than 10 years, independent economists have said.
The Institute for Fiscal Studies (IFS) said employees would earn less in actual wages in 2021 than they did in 2008.
Defending his Autumn Statement plans, the chancellor told Radio 4’s Today programme that the government had brought job growth. It was investing for the future, preparing for a “rainy day”, and government borrowing was on a “downward path”, he added.
Paul Johnson, Director of the IFS said, “This has, for sure, been the worst decade for living standards certainly since the last war and probably since the 1920’s,”
“We have seen no increase in average incomes so far and it does not look like we are going to get much of an increase over the next four or five years either.”
The “outlook for living standards and for the public finances has deteriorated pretty sharply over the last nine months”, he added.
“Half of the wage growth projected for the next five years back in March is not now projected to happen. On these projections, real wages will, remarkably, still be below their 2008 levels in 2021,” Mr Johnson said.
“One cannot stress enough how dreadful that is – more than a decade without real earnings growth. We have certainly not seen a period remotely like it in the last 70 years.”
The Resolution Foundation ThinkTank said, “Taking all this together we can look at the outlook for family incomes in the coming years, and it paints a grim picture,”
They stated that the poorest 10% would see an income hit of more than 3% by 2020 as a result of tax and welfare policies.
“While top earners were hit the hardest following the financial crisis, the big difference looking forward is that the biggest losers are lower income families, with the entire bottom third of the income distribution set to see incomes fall in the years ahead,” the Foundation said.
The Treasury’s own analysis, published alongside the Autumn Statement, reveals that the poorest 30% of households will see an impact on their incomes from tax, welfare and public spending measures by 2019-20.
This is primarily the result of the main working age benefits and tax credits being frozen in cash terms for four years from April 2016. That includes entitlements such as income support and jobseeker’s allowance.
The chancellor did offer some positivity to the lowest paid with the changes due to happen to Universal Credit – the new umbrella benefit gradually being introduced across the UK.
He announced a reduction in the rate at which the benefit is withdrawn from people when they start work. However, the Resolution Foundation report states this would have little positive impact on family’s finances.
“When set against all other policy changes announced since the 2015 election, the Autumn Statement only undoes 7% of the hit from benefit cuts to the bottom half of the income distribution,” it said.
The treasury documents show that middle-income families will see some increase in their income, but by no more than 1%. The richest 10% will see the biggest negative impact to incomes.
Key points | Autumn Statement 2016
- No further welfare savings measures
- Increase in Personal Allowance to £12,500 by the end of the parliament, and the Higher Rate Threshold to £50,000 by 2020-21
- £1bn to invest in full-fibre broadband and trialing 5G networks
- Increase in National Living Wage from £7.20 to £7.50 in April 2017
- New three-year NS&I Investment Bond available from Spring 2017
- Corporation Tax to fall to 17%
- Fuel duty frozen for a seventh year
- Ban on letting agents charging fees to renters “as soon as possible”
- £2.3bn Housing Infrastructure Fund for infrastructure for up to 100,000 new homes in high-demand areas
- New national productivity investment fund of £23bn to be spent on innovation and infrastructure
- Continued support for Help to Buy loan scheme and Help to Buy ISA
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