A Tale of Two Tax Families

Anna Lines – Chair, FTM

Since its foundation FTM has pointed out a blatant tax anomaly between double and single earner families. This is important, because taxation is one of the foundation stones of the framework set up by Government that guides us in our behaviour. Its current tax policy clearly encourages both parents to be in paid employment at a time in their lives when this is least compatible with their children’s needs, and does so at the expense of the traditional breadwinner family.

This tax year’s Personal Allowance (the amount of money that you are allowed to earn that cannot be taxed) is £4,745. That is regardless of whether the earner is a single man living at home with his parents or a husband and father who is a sole provider. Clearly, for tax purposes alone it is to our advantage to be part of a double-earner unit. As we are all taxed as individuals, a double earner couple (whose resources are pooled at home) enjoys 2 x the Personal Allowance (hereinafter called the PA) = 2 x £4,745 = £9,490. Today’s basic rate income tax is 22%.

Example:
2 earner couple with 2 children, combined income £30,000 p.a. net income £25,691
1 earner couple with 2 children, sole income £30,000 p.a. net income £23,884
Difference: £1,807.

2 earner couple with 2 children, combined income £70,000 p.a. net income £50,114
1 earner couple with 2 children, sole income £70,000 p.a. net income £46,441
Difference £3,673

At more substantial levels of income the gap between the two families widens. This is because the higher rate tax band starts at £31,400. Add to this the PA of £4,745 and this means that of any money earned beyond £36,145, forty per cent will be taken in taxation. However, where there are two earners there are not only 2 PA’s. There are also two bands of lower and basic rate tax. As long as neither earner touches more than £36,145 p.a. gross neither will be affected by higher rate tax. Thus, in theory it would be possible for such a family to earn 2 x £36,145 = £ 72,290 without being affected by higher rate taxation. Looked at in such a way the distinction between “rich” and “poor” families becomes blurred! Assuming that the same two couples above now enjoy a family income of £70,00 p.a., the tax difference between them (to the disadvantage of the 1-earner family) stands at £3,673.

The above figures were prepared by KMPG Tax Advisers and published by the Times on 19/03/04. They do not include working families’ tax credit.

The way to abolish this tax anomaly at a stroke is simple and two-fold. The first step would be to allow an unused PA to be transferred to the family’s earner. The second step would be to split the income of a sole earner family in two separate halves for tax purposes and then to subject it to the same fiscal rules as that of the double earner family. Leaving out NI contributions, our two families’ tax bills would now become the same.

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