UK married families hit hardest by taxman

MIDDLE-class British families are shouldering the most punishing tax burden in the world, an international analysis shows. It says a traditional family unit - married parents and two children, where one parent works - pays an effective tax rate of 70% on every extra £1 of income over average earnings.

The problem is caused by the Government's generous 'tax credit' benefits system for the lower paid. As someone earns more, they lose these tax credits - but face bigger income tax and National Insurance bills. And it is from that differential that the effective tax rate is worked out.

For a family with two children, that means that in effect they are paying 70% in tax on every pound of income above average earnings of £20,079. But for a single person with no children - who has no tax credits to lose when they earn more - the effective tax rate is only 33%.

The analysis, by the the Organisation for Economic Co-operation and Development, examined taxes and benefits in 30 industrialised countries.

The report shows there is a wide gap between the tax treatment of married wage earners and single people in all the countries with a tax credit system - but the differential is much greater in the UK than any other country.

For example, in second placed Australia there is an effective rate of 52% for families with one breadwinner and 32% for single people. The OECD said this had the effect of 'discouraging those affected from seeking to earn more by working harder'.

There were accusations that Chancellor Gordon Brown was 'destroying' families with the tax credit system, which has formed the main pillar of his drive against poverty since 1997.

The latest versions - Child Tax Credit and the Working Tax Credit - were introduced in April 2003. They are paid to about six million households as a means-tested financial boost based on their income.

But critics have attacked the way the system can penalise married couples with children while single people benefit - some saying couples are better off not being married.

Jill Kirby, of the Centre for Policy Studies, said: 'The Chancellor has ignored the importance of supporting family structures. He has discouraged the formation of families because he has made it more rewarding to not be married. The rest of Europe understands you need to build a system around the family. How can the Government not see that this system does not do this? It is destroying families.'

A Treasury source said that because the tax credit system was 'generous and progressive', it benefited families on lower incomes the most.

The OECD figures show, for example, that on average earnings a family with two children and a single breadwinner has a net tax burden - after taking into account benefits and tax credits - of only 9.8%, while a single person with no children has a tax burden of 24.4%. But families lose proportionately more than families in other countries as their earnings increase and they receive lower tax credits.

The Treasury source added: 'So if the single-earner in a family receives a £5,000 pay rise, they pay tax on that increased income, but their tax credit entitlements are also reduced.

'What the OECD has done is added together the tax paid on that increased income and the reduction in tax credits, and that means the figure for the UK is higher than for other countries with less generous tax credits or no tax credits at all.'