8. Policy context: Changes to taxes and benefits in 2013/14

This section provides information and analysis on some of the main changes to taxes and benefits in 2013/14.

Child and working tax credits

The basic element of working tax credit was frozen for the third year running at £1,920 a year. The family element of child tax credit was also frozen at £545 a year, while the child element rose by £30 (around 1%) to £2,690.

Another change is that the disregard for in-year rises in income was reduced to £5,000 from £10,000. This is the threshold at which an increase in income will alter the amount of tax credits someone is awarded at the beginning of each tax year. The reduction in the income rise disregard means that someone whose income has increased on the previous year is more likely to experience a fall in their tax credits.

Personal Independence Payment

Disability Living Allowance (DLA) was replaced with a new benefit called Personal Independence Payment (PIP) for adults aged under 65 in England, Wales & Scotland.

Eligibility for PIP is assessed using different criteria than for DLA. This assessment will include a review of an individual’s ability to participate fully in society rather than the severity of impairment. PIP also involves continuing assessment of claimants’ needs.

New claimants were assessed for PIP in a small number of areas from April 2013 and from June 2013 elsewhere. From October 2013, existing DLA claimants started to be assessed for PIP and the roll out is expected to be completed in 2017.

Between 2012/13 and 2013/14 there has been a real 7% decrease in the average amount of DLA/PIP received by households, driven by a fall in the number of people receiving these benefits.

The majority of households where someone is receiving DLA or PIP are towards the middle of the income distribution, particularly the middle fifth. This is often because disability related benefits make an important contribution to the incomes of those households. However, this should be treated with some caution as existing equivalisation scales do not take into account the additional needs of those receiving such benefits.

Housing benefit

From April 2013, households in England, Scotland and Wales deemed to be under-occupying socially rented accommodation had their Housing Benefit reduced.

This change involved a 14% reduction in the eligible rent used to calculate Housing Benefit if the accommodation is under occupied by one bedroom and a 25% reduction for under occupation by two or more bedrooms. This brought the social rented sector in line with the private sector, for which size criteria were already applied.

There were also changes relating to Local Housing Allowance (LHA), which is used to work out Housing Benefit for tenants who rent privately. Previously (since April 2011) LHA rates have been set to the 30th percentile (50th percentile from April 2008) of non-LHA rents in the relevant Broad Rental Market Area (and the number of bedrooms that the family is deemed to need). In April 2013 LHA rates were increased in line with either the September 2012 Consumer Price Index (CPI) or the 30th percentile of local rents, whichever was lower. This means that in 2013/14, in many areas, the value of LHA fell relative to local rents.

Child benefit

The freeze on the rates of Child Benefit, which started on 6 April 2011, continued into 2013/14.

In April 2013 a cap was introduced to the total amount of benefits people aged 16 to 64 can receive in England, Scotland and Wales. This cap was gradually introduced across Local Authorities, until nationally implemented by August 2013.

The cap is set at:

£500 a week for couples (with or without children living with them)

£500 a week for single parents whose children live with them

£350 a week for single adults who do not have children, or whose children do not live with them

The cap applies to the total amount that the people in a household receive from a range of benefits including Housing Benefit, Income Support, Incapacity Benefit, Child Benefit, Child Tax Credit and Carers Allowance.

Households that qualify for Working Tax Credit, or received any of a number of benefits including Disability Living Allowance of Personal Independence Payment are not affected by the cap.

Universal credit

The roll out of Universal Credit began in 2013/14 in certain areas of Manchester and Cheshire, as well as Hammersmsith and Inverness.

When fully rolled out, Universal Credit will replace the following six means tested benefits and Tax Credits with a single integrated benefit for working age people:

Income Support

Income-based Jobseeker's Allowance (JSA)

Income-based Employment and Support Allowance (ESA)

Housing Benefit

Working Tax Credit

Child Tax Credit

In the pilot areas, eligibility was limited to single jobseekers. The relatively limited scope of the pilot in 2013/14 means that the impact of Universal Credit on the ETB data was negligible. As Universal Credit is rolled out more widely it is anticipated that its impact on ETB data will be more evident.

Income tax

Age related personal allowances started to be phased out in 2013/14, with personal allowances based on people’s date of birth rather than age. This meant that age-related allowances were restricted to existing beneficiaries.

The personal allowance for those born after 5 April 1948 (under 65 at beginning of tax year) increased from £8,105 to £9,440. By contrast, the personal allowances for those aged 65-74 and 75+ at the start of 2013/14 remained at £10,500 and £10,660 respectively.

In addition, there was a real terms reduction in the starting level for the higher rate band, from £34,371 to £32,011. Combined with the personal allowance, this meant that people paid the higher rate of 40% on any taxable income above £41,450, down from £42,475 in 2012/13.

The increase in the personal allowance for under 65s had a relatively small impact on the bottom fifth of households due to the smaller proportion of people with taxable incomes over the previous personal allowance of £8,105, in that group. Also, in higher quintiles, there are more households with two or more people with taxable incomes meaning that more than one person in the house will potentially be affected by the increased allowance. The decrease in the threshold for higher rate Income Tax contributed to higher income individuals receiving a smaller benefit from this change, relative to the size of their income.

The additional rate of income tax, paid on taxable incomes above £150,000 was reduced from 50% to 45%.

Council Tax

In 2013/14, 61% of eligible local authorities in England made use of a Council Tax freeze grant. This meant that the average Council Tax bill for a band D dwelling increased by just 0.8% on 2012/13 rates.

Council Tax levels were frozen in all local authorities in Scotland. However, in Wales, the average band D Council Tax increased by 3.2% compared with 2012/13. There was also a 2.7% increase in domestic rates in Northern Ireland.

As Council Tax is regressive, with the bottom quintile paying the largest amount as a proportion of their gross income, it will be households in this group that have benefitted most in relative terms from any freeze. However, the absolute savings will be higher at the top of the income distribution.

Council Tax reduction

Council Tax Benefit was abolished in April 2013 across England, Wales and Scotland, and replaced with a localised system of support for working age people on low incomes. Local authorities are now responsible for running their own Council Tax reduction schemes, also known as Council Tax Support. In addition, the funding made available by the Government for this purpose was reduced by 10%.

The Welsh Government and Scottish Government agreed with their local authorities that people receiving support with their Council Tax would not receive less than they would have done if claiming Council Tax Benefit. However, in England the level of support provided to households may vary across different parts of the country.

It is households in the bottom fifth of the income distribution who receive the most in Council Tax Reduction (and rates rebates in Northern Ireland). The average amount received by this group fell from £343 in 2012/13 to £304 in 2013/14 (both figures in 2013/14 prices).

Alcohol and tobacco duties

The 2013 Budget saw the end of the beer duty escalator. Beer duty was instead cut by 2%, a reduction in duty of 1p per pint. Duties for other forms of alcoholic drink continued to rise by RPI inflation plus 2%, equating to a 5.3% increase. This added approximately 10p to a bottle of wine and 39p to a bottle of whisky.

The duty rate on tobacco products also increased by RPI plus 2%. This increased the price of 20 cigarettes by approximately 26p and a packet of 5 small cigars by 9 pence.

Machine Games Duty

Machine Games Duty (MGD) is a tax on some games machines and, from February 2013, replaced Amusement Machine License Duty (AMLD) as well as the VAT charged on the income from these machines. The criteria for whether a games machine is liable for MGD is different from that for AMLD, as are the rates at which duty is paid.

MGD is an intermediate tax, which means that we assume a proportion of the duty paid by the business is passed on to the consumer, or in this case, the person who gambles on these machines, in the form of reduced odds.