Debt problems - debt, taxes & the Budget

11 April 2008

On a low income, dealing with debt problems is never easy - but for some people, this year`s Budget may have made it even harder. Although the Basic rate of income tax dropped from 22% to 20%, the Starting rate disappeared.

Before April 2008, the first £2,230 of someone`s taxable income was taxed at 10%, then the next £32,370 was taxed at 22% (see table). But now, everything up to £36,000 is taxed at 20%: losing the Starting rate means that people will pay twice as much on the first £2,230 they earn.

In a nation where the average adult owes almost £5,000 in unsecured debt, any changes to someone`s income after tax could make a real difference to their efforts to tackle their debt problems. When they need all or most of their disposable income for debt repayments, even the smallest change could mean they need to look for debt help immediately.

Good news or bad news?
Overall, the changes could be good news or bad news, depending on how much you`re earning. For people on average or higher incomes, this was a good Budget. But according to the Commons Treasury Committee, some low-paid people could be around £20 per month worse off. Clearly, `finding` an extra £20 a month won’t be easy for people already struggling with their debt problems.

It seems £18,500 is the `break-even point` - the point at which people gain more from the lowering of the Basic rate than they lose from the abolition of the Starting rate. Of course, debt is a problem that affects rich and poor alike. Someone with a high salary and plenty of debt may be just as likely to need debt help as someone with less money and less debt. However, the two may well need different debt solutions: for example, the first person might consider an IVA (Individual Voluntary Arrangement), while the second could be better off looking into debt management.

Tax credits – the answer to debt problems?
Many people are unhappy with the government`s claim that a more generous tax credit system should make up for any loss. Why, they say, should they have to claim benefits to replace money they`ve paid in tax? While they’re waiting for their extra tax credits to come through, they`ll be struggling to keep up with debt problems that were already stretching their finances to the limit before their disposable income dropped.

Besides, many people don`t know what they`re entitled to, or don’t claim for it - and when the tax system assumes that people will make use of the tax credit system, anyone with debt problems who doesn`t take full advantage of it could soon find their financial situation going from bad to worse.

Top of page

Fill in our form and
get FREE help now