Counting the cost of the tax credit changes
In his speech the Chancellor said that “It’s because we’ve taken…difficult decisions….that Britain is able to afford a pay rise. Because let me be clear: Britain deserves a pay rise and Britain is getting a pay rise.” It sounds great but when you look at his plans it turns out that low-paid workers will see their incomes fall, many by thousands of pounds. Any union negotiator who told their members they were getting a pay rise and then delivered this would be lucky not to be lynched.
The Chancellor announced that the National Minimum Wage which is currently £6.50/hour and already due to rise to £6.70/hour in October will be enhanced to £7.20/hour in April 2016.
Assuming 35 hours a week and 52 weeks a year that means the National Minimum Wage will rise from £11,830/year to £12,184/year in October and then to £13,104/year next April.
He also announced that the personal tax allowance would rise next April from the planned £10,600 to £11,000 and that basic rate taxpayers would pay £80/year each less in income tax.
But the Chancellor also announced big changes to the system of tax credits. Tax credits have a threshold and for every £1 you earn above that threshold the tax credit is currently reduced by 41p.
This is how the threshold and taper system works today.
The Chancellor reduced the threshold that applies to tax credits from £6,420 to £3,850 and he increased the taper from 41p to 48p.
And those changes cost low-paid workers far more than they’ll gain from higher hourly pay and lower income tax.
These two tables below show the changes that take place for a couple with one earner earning the minimum wage with 1 child and 2 children.
In both cases their annual income is cut by £1,277.50.
By contrast, on 22 May 2015 HMRC published their income tax liability statistics. They showed that the 5,000 taxpayers, who each earn more than £2m/year will, between them, earn (£23.8bn) £23,800m in 2015/16. They will, on average, each pay over £250,000 less in income tax as a result of the Chancellor’s earlier decision to cut the 50p tax rate to 45p.