Tax Reforms Needed
Reform of the tax system is needed to help ‘hard-working families’, writes Mothers At Home Matter’s chair, Anne Fennell.
Families are struggling. They face an unprecedented rise in fuel and energy costs in the realm of £2k a year but do not have the means of meeting this. Many of the problems families face arise from a tax system which far from helping them does not even recognise them and whilst it elevates the individual it creates the problems which will see families pushed further into poverty.
All families with children now face a dilemma. How can they bring home more disposable income to meet the rising cost of living? Mothers can no longer afford to be home to care but equally childcare costs are prohibitive which means they can’t work either! Who will now care for our children? There was little comfort in the Chancellor’s Spring Statement despite his claims to help ‘hard-working families’. The Chancellor spoke of cutting tax for ‘hard working families’ and reforming the tax system to make it fairer and simple, with those with the broadest shoulders bearing the majority of the cost. But the reality is that the tax system cannot help families because it does not recognise ‘the family’ but only the individual. Until it does so families will continue to face injustice and those families with one sole earner where the other partner stays home to care continues to bear the biggest tax burden and face the severest penalties.
“All families with children now face a dilemma. How can they bring home more disposable income to meet the rising cost of living? ”
The tax burden is rising to an historic high. Never has it been more necessary that we should be sharing the burden between us as fairly as possible and based on a family’s ability to pay. This is not happening at present. Income tax accounts for 25% of all government revenue, and National Insurance contributions an additional 18%. Both are based on an individual’s earnings not how well off the family is. Taken together these two taxes account for almost half of all government revenue. If these are not fair the tax system will not be fair.
For too long we have believed the narrative that how well off a family is will be based on the individual’s income. It was this narrative that was used so effectively by George Osborne in 2013 to remove child benefit from the higher earner:
“We have always been clear that those with the broadest shoulders should carry the greatest burden. ...Some people - the richest 15 per cent of households with children - will lose out from January next year but ... it is very difficult to justify continuing to pay for the Child Benefit of the wealthiest 15 per cent of families in society.” Conservative Party Press Release 29th October 2012 (Politics Home)
Hidden in the papers released by the Treasury last week is a table that shows the gross income a couple with two children needs to have an average living standard. Despite George Osborne’s claims the Treasury does understand that living standards are based on the household’s overall income divided by the number of dependents living on that income. A family with two children need a gross income of £52,100 to be in the middle of the income distribution. But at this income, if they are a single-earner family, they start to lose their child benefit and they pay a higher rate of tax. This is not the case if both parents work. In this case, both parents may be on a basic rate of tax and retain their child benefit. The single-earner family will be paying the same tax as an individual who at this income £50k is in the top 15% wealthiest families. The family needs to earn twice as much as the single adult to have the same standard of living. These figures moreover don’t take into account housing costs!
Table: Median gross income for each decile (£ per year, 2021-22) for different household compositions
Let us take a family with three children on £50k. This family will be in the lower half of income distribution. The rise in fuel prices and gas and electricity are estimated to cost families an extra £2k a year. How will this family be able to meet this huge unprecedented and sudden rise? The father will work extra hours, earn more money. But what does he find? For every £1 earned he loses approximately 65p in tax, NI and now loss of child benefit. He only keeps 45p in every £1 earned. Should the wife return to work she can earn up to £12k without paying tax. She can earn £1 and keep £1. They can keep their child benefit. But at what cost? Her desire is to look after her young children. Is it fair that families who can command (in a free market) incomes in the top 15% are brought into poverty by government policies? Can it be fair that the heavy burden of taxes they pay will make their households poorer than some of those their taxation contributions are supporting? Is it right that taxation policies separate mother and child?
Without taking the family into account any raises to income thresholds further disadvantages the single-earner family. Already on £30k a single-earner family pays twice as much tax as a dual-earner family. The household income must be taken into account to make the system fair.
Families need support in raising children. Childcare was once supported in the home through tax allowances and universal child benefit. With the introduction of ‘independent taxation’ in the 1990s, the allowances which recognised family dependencies, such as the married couple allowance or child allowance were removed. The result is that our tax system today takes no account of the family. The income tax systems in Germany, France and the USA do. In Germany, a couple with two children in 2020 did not pay income tax until a household income of 52,00 euros (£42,000). In the States, they did not pay income tax until £60,000! In the UK in 2021/22 a couple with two children and two equal incomes totalling £42,000 would have paid £3,373 in income tax & £2,946 National Insurance. A family with one earner would have paid £5,886 income tax and £4,256 National Insurance. In Germany and the USA they would have paid none.
“...Targeted help of tax cuts or tax allowances for families with children would be far more effective than raising tax thresholds for all individuals which ultimately help individuals more than the family.”
The benefit system does compensate for the unfairness in the tax system but it has its own injustices: a family can be much better off apart than together by about £12k. The system has a generous housing element to support families with housing but only if they are renting. There is far less support for families with mortgages. And there is a tax trap. For a family on Universal Credit to earn extra disposable income to make up the extra £2k in rising fuel and energy costs the primary earner would have to earn £7k! That is because for every extra £1 he earns 70p gets taken back by the Treasury — reduction in Universal Credit, National Insurance, Income tax. But the tragedy is that the mother is also caught in this trap, so that even if she goes out to work to plug the gap she will earn at most 55p in every £1 she earns and if she earns over £12k she will bring home less.
If the Chancellor is sincere in his desire to help ‘hardworking families’ and I would argue that caring at home is a form of ‘hard work’ and of value to society, then more targeted help of tax cuts or tax allowances for families with children would be far more effective than raising tax thresholds for all individuals which ultimately help individuals more than the family. Families where a parent is at home caring for their children are bearing the biggest tax burden. But families of all kinds are bearing a bigger share of the tax burden than taxpayers without children and are going to be the hardest hit by inflation and the rise in the tax burden. It is they who need to be able to keep more of their earned income.
On Wednesday Mothers at Home Matter joined Tax and the Family at an online event hosted by Miriam Cates MP and CARE on the Taxation of Families. It is vital that we change some of these injustices and penalties so that once again we can support the vital work of care in the home easing the pressure on families for both parents to work long hours away from the family.
For more information on how the tax system affects families please see: