Three million families on tax credits will next year face a soaring effective marginal tax rate (EMTR) the Institute For Fiscal Studies (IFS) confirmed yesterday.
Responding to a question from CARE’s senior tax consultant Don Draper at Wednesday’s post-budget briefing the IFS said families on tax credits could expect an astonishing marginal tax rate of 80 per cent.
This means the Treasury would take back 80 pence for every extra pound earned – 20 per cent in income tax, 12 per cent in national insurance contributions and 48 per cent from the withdrawal of tax credits.
CARE’s most recent Taxation of families – International comparisons (2013) report has already revealed that a one-earner married couple with two children on £27,000 already face an EMTR of 73 per cent, which is twice as high as the OECD average.
CARE CEO Nola Leach said:
“Although this information was in the Budget Red Book this devastating news has received remarkably little attention.
“Paul Johnson had said earlier that the families affected would on average be losing £1,000 a year as a result of changes announced by the Chancellor.
“If the Treasury are going to take back 80 per cent of any new income a family earns this is going to be very difficult as they struggle to make ends meet, especially as they will now be even more disadvantaged.
“A report CARE published only last week showed that the effective marginal tax rate for a one-earner married couple with two children on £27,000 was already the highest in the OECD area and twice as high as the OECD and EU average.
“This is not the way to support hard-working aspirational families and marginal rates need to come down not go up.”
CARE’s tax consultant Don Draper said:
“These families will gain very little from the new National Living Wage because from every extra pound earned the Treasury will take back 80p.
“It makes sense to get families off these heavily means tested credits but there are better ways of doing this.
“A fairer and more effective solution would