What’s fair in tax and spend? Poorest workers to lose out unless government changes course on in-work support
Today, one in five single parents in full-time work is bringing up their family in poverty. But new research from Gingerbread shows that government measures intended to help the lowest-paid workers will actually benefit them far less than workers on higher incomes.
It is a well-rehearsed argument that the current economic climate means there are difficult public spending choices to be made. Equally, the government has made much of the fact that “we’re all in this together”, and that public spending measures must pass the test of “fairness”. It is therefore deeply worrying that two of the key government measures intended to support low income workers – raising the personal tax allowance and introducing Universal Credit – will in fact interact to disadvantage those very same workers, relative to higher income workers not in receipt of Universal Credit.
From October 2013 the welfare system will be overhauled, with the introduction of Universal Credit replacing most government financial support, including working tax credits. According to its architect, Work and Pensions Secretary Iain Duncan Smith, “The universal credit will make sure that the poorest in society will be better off.”
Alongside this flagship policy, in three successive budgets the government has increased spending on the personal tax allowance, aimed at helping lower and middle income earners, with the next increase due in April 2013 at a cost of £3.32 billion for 2013-14 alone – a policy described by the Deputy Prime Minister earlier this year as “one of the most radical tax policies to have been promoted in British politics for many, many years”.
However, these two schemes will actually combine to disadvantage the lowest-income workers. Here’s why: Universal Credit is calculated on post-tax income, and the personal tax allowance increase will raise most working people’s incomes by £200 for every £1,000 increase. The Treasury will then reduce low-paid workers’ Universal Credit payments by £130 for this perceived £200 increase in earnings. Meanwhile, workers who are higher up the income scale – therefore not reliant on government financial support through Universal Credit – will be £200 better off, period.
Universal Credit is tapered away from recipients at 65% of every pound they earn (over a certain level – called the earnings disregard). For 4 million people in low income work and in receipt of Universal Credit, the Treasury will give money with future personal tax allowance increases and take two-thirds straight back by cutting Universal Credit payments. [The eagle-eyed amongst you will note that a similar claw-back already happens for those in receipt of in-work housing benefit and council tax benefit].
We regularly hear from single parents who tell us that it is difficult for them to go out to work – when they desperately want to – as it simply doesn’t stack up financially. But here we have one government policy explicitly designed to support workers on the lowest incomes, set to be crippled by another. Although successive governments have highlighted work as the primary route out of poverty, around 1 million working single parents (and up to 4 million low income workers overall) will lose out on government support that will be received in full by basic rate taxpayers on higher incomes. It just doesn’t seem fair, does it?
At the very least Gingerbread believes that the government must increase the earnings disregard in Universal Credit to reflect future increases in personal tax allowance, to make sure that all basic rate taxpayers benefit equally from every future rise in the allowance. But given the sums of money involved – £3.32 billion in 2013-14, remember – we recommend that the government considers reallocating (some of) this money to:
- Reduce the Universal Credit taper rate from 65p lost for every pound earned to 62p
- Increase the percentage of childcare costs covered by the government from 70% to 80%
- Raise the per child allowance in Universal Credit by £300 per year.
We believe that these measures would much more effectively target financial support at those who need it most, and give working people the opportunity and incentive to lift their families out of poverty.