Taxes and Personal Debt Put Strain on Household Incomes

This week will see Gordon Brown finally admitting that rising taxes in the UK are resulting in take-home pay struggling to keep pace with inflation.

This Friday, the Office for National Statistics will publish The Effects of Taxes and Benefits on Household Income 2004-05. This report publishes the results of an annual analysis that outlines the increasing burden of council tax, National Insurance and other national taxes.

Economists are of the belief that there is growing evidence that take-home pay is being squeezed by higher taxes and could partly explain the electorate’s recent growing resentment against the Government, despite the economy’s continuing growth.

Allied to increasing taxes is the nation’s growing personal debt problem and together, they are having a detrimental effect on take-home pay. Many households in the UK are struggling to meet repayments on debts such as personal loans and credit cards, for example, and are therefore finding their disposable income shrinking, as their pay packets have to meet the demands of increasing taxes as well.

According to the latest data from the ONS, income tax payments were 7.5 per cent higher in the year to the end of March 2006 compared with the previous year. An equivalent measure of National Insurance revealed a rise of 5.8 per cent during the same period.

The chief executive of the Centre of Economics and Business Research, Doug McWilliams, said rising taxation was having a negative effect on consumer spending. “ This is an important driver behind the falling growth in take-home pay and hence the continuing weakness in retail sales,” he said.

McWilliams also pointed out that Voca, the payment processing company, showed that disposable income was still rising but that the increase was slowing due to higher National Contributions and council tax.

Voca revealed that take-home pay growth fell from 3.7 per cent to 3.3 per cent during March. The index, which reflects pay at FTSE350 companies, has shown slowing growth all year.

The survey also revealed the growing gap in pay between the service and manufacturing industries, showing that pay rises in service industries were twice that of those in manufacturing.

“ This fourth consecutive month of decline in the Voca take-home pay index brings it closer in line with inflation and show that growth in real disposable income is being squeezed,” said Richard Cooper of Voca.

Alisdair Milton
8th May 2006

More UK Credit Card News
Try our feed