Increasing the personal tax allowance to £10,000, to allow workers to keep more of their earnings before they start paying tax, sounds like a no-brainer as a way of helping hard working families trying to manage. However, a closer examination tells a different story – many poorer working families will keep only a fraction of the increase in net pay. This is because most of it will be deducted from any housing benefit or council tax support they receive. Higher income families in contrast keep all the net gain.
A single person earning £30,000 a year will keep over £13.50 a week (about £700 a year) from the rise in the personal tax allowance. However, many families with children with someone earning £20,000 a year will only keep about £4.75 a week (about £250 a year) and families with children with someone earning £13,000 a year (someone working fulltime at just above the minimum wage) are only likely to keep about £2 a week (about £100 a year). Raising the threshold alone is therefore not successful at assisting hard working low income families.
For example:
A family with two children with someone working fulltime on the minimum wage earning £13000 a year are likely to receive some housing benefit and council tax support. This means that any rise in net earnings will lead to an immediate loss of benefit support of 85 pence for every extra £1 of net income.
Assuming a rent of at least £100 a week, even if they earn £20,000 a year, the same family, will still receive some housing benefit. They would lose 65p of housing benefit for every extra £1 of net income.
Will Universal Credit solve this problem?
With the introduction of Universal Credit, this problem will in fact affect more families. This is because entitlement will, like that for housing benefit will be based on net income. This means that families who currently only get help from tax credits where entitlement is calculated based on gross income, will under universal credit, also keep less of any rise in net income..
What change can be made to ensure gains from raising the tax allowance, reach the pockets of hard working families?
There is no question that, in times of austerity, those who need support the most are the families in low paid work. They need it more than single people without dependents who are more likely to keep all the benefit of the rise in the personal allowance – and more than higher earners. To make sure that working families on low incomes gained the same amount as others from raising the tax threshold a simple change to the way their benefit – or universal credit is calculated can be made. This could be done by simply raising the level of the earnings that people can keep before their current benefits – and Universal Credit – are reduced, to take into account the increase in the tax allowance, whenever it is raised. If this was done it would enable the government to better meet their stated aim of of ‘supporting hard working families across the country’
* Sue Royston is a policy officer at the Citizens Advice Bureau
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10 Comments
To infer from your calculations that “Raising the threshold alone is therefore not successful at assisting hard working low income families” is disingenuous. Your own figures clearly show that it does help them, albeit not as much as it helps those who are not in receipt of means-tested benefits (though that in itself is debatable, as the marginal rate of return from an additional pound to a family with one earner earning £20,000 is surely far higher than the marginal rate of return from an additional pound to a single person earning >£30,000).
It is certainly true that withdrawal rates for many in-work benefits create enormously high effective marginal tax rates (EMTRs). However, “raising the level of the earnings that people can keep before their current benefits… are reduced” surely just shifts this problem further up the income scale, so that the very high EMTRs now disincentivise a different but still far-from-wealthy group of people.
It could also be enormously expensive, and that’s no small issue. It has been one of the Lib Dems triumphs that they have managed to push the policy of raising the tax threshold through Cabinet and the Treasury despite enormous Conservative opposition. This opposition has been driven by a sense that the Treasury cannot afford to sacrifice the £11.5 billion in foregone taxes. This raises the question (too often dodged by those who advocate additional spending) of how much it would cost to increase the level of income at which withdrawal rates kick in, and where the money should be found.
Have you calculated the cost of your proposal? What alternative revenue cuts or tax rises are you proposing?
As ever the stated aim of ‘supporting hard working families across the country’ must be weighed against the stated aim of balancing the economy and putting the government’s finances back on a firm footing.
Tom Papworth
You’ve missed the point. In the current system tax credits are assessed on the basis of pre-tax income meaning families on low incomes see the full benefit of tax cuts but under the UC taper 65% of any tax cut is clawed back through withdrawal of UC support. The Tories far from opposing raising the tax threshold embraced it . It is now obvious that the intent was always to cut taxes for the relatively affluent and to do little for the working poor and that the Lib Dem leadership have connived in this con trick.
I think the author of this article raises a very important issue that echoes the concerns raised by Tony Greaves in a recent debate in the Lords.
My own view is that we should be greatly concerned with:
· The squeeze on the living standards and increasing poverty levels of those with incomes below £10,000 per year.
· The continuing disincentives associated with the relatively high level of marginal withdrawal of benefits at 65% that coupled with transport and other work related costs continue to make a move from benefit dependency to work problematic for far too many.
The response I would advocate is:
· Replace the £10,000 personal tax allowance and £7,755 lower national insurance threshold with an earnings indexed tax credit of £3200 per year to supplement the earnings of the lowest paid.
· Replace the existing Job seekers allowance, employment support allowance, income support, working tax credit, child credit and child benefits with a non-means tested Citizens Income. It should be available to all long-term residents and equivalent to the earnings indexed tax credit of £3200 per year paid to those in employment (£1600 per child).
· Cap the marginal rate of benefit withdrawal at 50% of incremental after-tax income.
I believe these measures would be broadly revenue neutral but effect a redistribution of tax reliefs to where they are most needed. Coupled with reform of the current employment support schemes, affordable child care provision and employment conditionality for housing assistance such a transition is potentially transformational in both basic economic and inequality terms.
I’m not really sure that the purpose of the change to the tax threshold was to benefit the poorest, was it? As far as I can see (and this article only reinforces that point) it has two benefits:
1. Benefitting the people not far above the poorest – the squeezed middle – who might not be the poorest, but they’re still struggling and losing income in real terms, and this will significantly help them.
2. Reducing the ludicrous system whereby someone is taxed on their income and then has it given back to them through the benefits system. At the margins this will mean fewer people on benefits. If someone who was just below the threshold for CT benefit or housing benefit and no longer needs it when the threshold rises, that’s a good thing – in addition to keeping some of the extra money, they don’t have the hassle and worry of relying on benefits. For your two families – they may not be much better off, but they *are* better off, and they’re still seeing more of their money come from wages and less from the state, which can only be a good thing.
In other words: yes, high marginal taxation at low income levels is a problem, but it’s not a problem that’s created by the higher income tax threshold. Part of the problem is that our leadership seems to treat this policy as a panacea, which it isn’t, but it’s still a policy that has made a lot of people on fairly modest incomes better off, and a lot of the criticisms commonly made are about its failure to solve things it was never really intended to solve.
As an asside, I also think we need to be careful of saying that single people don’t need the money as much. Superficially it may be true, but at the same time there are lifetime taxation issues here – most single people are young so are saving hard for the future, which may well involve saving for when they have kids. For those who remain single, they may well end up better off – but at the same time, single life is often more expensive (higher rent, higher bills, etc), so they will lose in other areas.
@JoeBourke
I think the fundamental problem is: how do we withdraw benefits without it being a disincentive? and so provide encouragement to people to make the progression away from benefits togainful employment/self-employment.
I think part of the problem is that the government are just too keen to withdraw benefits – we only need to look at the daftness surrounding the current tax credits system to see the problems this causes.
I suspect that what is needed is a more favourable system, as you suggest the rate of withdrawal needs to be limited, plus I suggest the withdrawal should probably be delayed to say the next tax year.
As usual I agree with Laura.
We’ve gained from the income tax cut and lost a slice tax credit income as a result.
But we’re still better off overall, and we’re keeping more of the money we earn and are less reliant on the state and have a greater incentive to work rather than stay on benefits.
“But we’re still better off overall”
No. The net result of the tax and benefit changes made by this government is that everyone is worse off – and the people who have done least badly (viewing changes as a percentage of income) are those on above average incomes (excluding the 10% at the very top).
A sight mistake in the article. A poor family would lose 65p in he pound council tax benefit plus 20p in the pound housing benefit. A total of 85p in the pound loss of benefit. For every pound earned in overtime, a poor person would have a net gain of 15p.
When I got a job in 2008, I received £60 per week working tax credit. The following year it dropped to £30 per week. Now it is zero since 2010.
In the words of Groucho Marx, “I have worked my way up from nothing to a state of extreme poverty.”
I endorse Laura’s comments… What we need is to continue to raise the threshold to the minimum wage/week, but then to look at the first tax rate. Going suddenly from zero to 20% is quite a step and needs to be more gradual. The next, say, £5k of income at 10% would ease that threshold.
But surely the raising of the threshold so that people need less benefit is what it is all about, ie keeping more of what is yours so that you are less dependent on benefits. Being taxed and receiving benefits serves no purpose other than to employ two lots of administration, which is what the wholesale review of tax and benefits is partly designed to eliminate.
To attack a good tax policy because there are flaws in benifits policy is pointless. If you want to talk about ensuring that the marginal rate of loss due to benifits is capped, that sounds like a good idea but it is no reason to say theat the raising of the threshold is not a positive step. If anything the flaw is the fact that NI has been ignored and continues to tax the poor for no good reason (and particularly those who have uneven earning patterns).