From the TUC

Saving Our Safety Net Fact of the Week: Taxing disability benefits would hit hundreds of thousands of low-paid disabled workers

03 Apr 2015, by in Society & Welfare

Saving Our Safety Net Fact Of The WeekThere’s something (horrible) for everyone in the list of possible benefit cuts leaked to the BBC last week. In this column I want to concentrate on the proposal that people would have to pay income tax on their disability benefits if their incomes including these benefits were over the minimum threshold.

According to the BBC, this would apply to Disability Living Allowance and Personal Independence Payment (which is gradually replacing DLA) – according to the Institute for Fiscal Studies, this policy would bring in £915 million a year.  If it was extended to Attendance Allowance (which helps with care costs for people aged over 65) another £515 million would be raised.

The first thing to realise about these benefits is that they aren’t out-of-work benefits. I want to emphasise this point, because ministers often seem not to grasp it – back in 2010 Mr Osborne justified the abolition of DLA by claiming it would improve work incentives and his colleagues have repeated this error from time to time since then.

DLA isn’t really like the income you get from a job, other benefits or investments (which makes the morality of taxing it dubious) and it isn’t designed to compensate disabled people for not having paid jobs. Employment and Support Allowance does that, instead it’s designed to help meet the extra mobility and care costs associated with being disabled.

DLA and PIP are supposed to create a level playing field, so that someone who faces disability-related costs can have the same standard of living as a non-disabled person with the same income. In practice, it’s paid at too low a level to achieve this, but it does make a big difference. (Full disclosure: the TUC is a member of the Disability Benefits Consortium, and we support the number 1 demand in the DBC’s manifesto, which is to take steps to compensate disabled people fully for disability-related costs, not reduce the support that already exists.)

So it is perfectly possible to be employed and get DLA/PIP and, for workers who qualify, it makes a huge difference. These benefits are often used to pay for, for instance, an adapted Motability car or other services that allow the disabled person to live an in dependent life. And many use that independence to get and keep their jobs.

According to information revealed as the result of a Freedom of Information inquiry, in February 2012 there were 386,000 working age DLA claimants in Great Britain who were in employment, 21 percent of all working age claimants. In addition, a study for the DWP that looked at people who received both Incapacity Benefit and DLA in 2008 found that about one in five (at that time 235,000 people) would have liked a job then or at some time in the future and that how much better off they would be in work was a key issue for them.

This suggests that over 600,000 people could find it more difficult to keep their jobs or to move into employment if their DLA or PIP became liable for tax, reducing their ability to pay for services that remove barriers to employment.

A second point to note about DLA/PIP is that many people already use their benefit to pay for services from their local authority. Reducing central government support for these disabled people by taxing their benefits would to a large extent, simply lead to yet more pressure on local government budgets.

But the most important thing to remember about this proposal is that it will hit low-paid disabled workers. We’ve already had a series of attacks on the independence of disabled people, with the abolition of the Independent Living Fund, the fact that PIP is much less generous than DLA and cuts in Employment and Support Allowance; this is the latest and its effects will be particularly felt by low-paid disabled workers. Disabled people are more likely to be low-paid than non-disabled people; according to the Low Pay Commission:

Around 11.7 per cent of jobs held by disabled workers were minimum wage jobs compared with 7.3 per cent for non-disabled workers. Disabled workers in turn held 12.8 per cent of all minimum wage jobs, despite accounting for 8.4 per cent of total employee jobs.

Take someone working 35 hours a week at the minimum wage. They earn £11,830 a year; from 6 April, they will pay 20 percent income tax on earnings over the personal allowance of £10,600: £246 a year. If they receive the standard daily living component of PIP and the standard mobility component, their tax liability will rise by nearly £800, to £1,036.40. If they receive the enhanced rate of both components their total tax liability will increase six-fold, to £1,681.75. As a proportion of their income excluding PIP, this amounts to 12 percent.

But a defender of this policy might reply “but you’re forgetting our plans to raise the personal allowance, they gain from that change.” The benefit cuts have to be implemented by 2018, while the planned increase in the personal allowance to £12,500 will not be completed till 2020.

Nonetheless, let’s imagine that the increase to £12,500 has taken place and ask how much this offsets the taxation of DLA/PIP. Of course, someone earnings £11,830 wouldn’t benefit from all of the increase (which is one of the reasons why we’re underwhelmed by this policy), so let’s imagine someone earning a bit more than the minimum wage. In fact, let’s imagine someone earning over £12,500, so they benefit in full from the increase from £10,600.

£1,900 of their income would be taxed at 20 percent under the current system and wouldn’t be taxed at all under the new arrangements, making them £380 a year better off. If they received the standard daily living and standard mobility components of PIP they would pay an extra £790.40 –twice as much as the gain from the higher personal allowance.

If they received the enhanced rate of both components their tax bill would rise by £1,435.72 – more than three times as much as their gain from the higher personal allowance.

Ministers insist on how much low-paid workers will gain from raising the personal allowance, they should therefore accept that these losses are even more significant. It is hard to see this reform as a vote-winner; indeed, as I’ve noted before, all the options to achieve the government’s planned £12 billion of benefit cuts look unpalatable.

Which explains why Iain Duncan Smith and George Osborne have both refused to say which cuts they are planning. But they’re going to have to do something this nasty to achieve the cuts they have committed to. So one of the interesting spectator sports of the election campaign will be to see whether Ministers can be cornered into promising not to make this cut.

So far, the answer is “no”. When the Prime Minister was asked about this on Tuesday on the BBC breakfast show he managed some fancy footwork, but he refused to rule it out:

Bill Turnbull Speaking of choices if I may, one idea that may or may not be on the table for Iain Duncan Smith and his team is taxing disability benefit. Can you rule that out?

David Cameron What we have done through this parliament is we have actually improved the money that goes to the most disabled people in our country. We’ve replaces one benefit, Disability Living Allowance with a new benefit, Personal Independence Payment. It is working well, it is also going to lead to some savings over time and we haven’t created that benefit in order to undermine it. We want to enhance it and safeguard it. We’ve said that one of the savings will come from freezing working age welfare for two years, things like unemployment benefit. That is a difficult choice but I think it is right that work should always pay in our country and as we look to find these welfare savings, we should apply some very clear principles. One, that work should always pay, two that the most disadvantaged and most disabled should always be protected, we look after those in need and third, that people who have paid into the system and look forward to a dignified retirement, we should look after them too as we have done so.

There’s plenty of wiggle room there but I wonder if Mr Cameron and his colleagues will be able to keep this up for five more weeks?