Dan Rust, Turquoise Training and Consultancy, asks what the budget means for work incentives?

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With controversy and drama accompanying the budget, one could be forgiven for missing the big changes that are coming up this April. Changes to benefits, especially disability benefits, have been the headline measures – even claiming the Work and Pensions Secretary’s job. It will be changes to tax and pay that have the biggest impacts on individuals in April, however.

On the Guardian website last week, I crunched the numbers for their piece looking at what the budget means for various households. With very little change to the majority of benefits in April, indeed working age benefits have been frozen, the key information from the piece is about tax cuts.

The most striking point that comes out of the income and tax figures that will take effect from April this year is the disparity in the outcomes for those at different levels of the income scale. Those with the lowest incomes see the least benefit from tax cuts and those on benefits gain little from pay rises.

The immediate impacts on the majority of people are:

• The National Minimum Wage for those over 25 goes up by 50p an hour (this is the National Living Wage)
• The threshold for the basic rate of income tax goes up to £11,000.
• The higher rate income tax threshold goes up to £43,000.
• The higher rate National Insurance threshold goes up to £43,000.
• Benefits and tax credits are frozen.

There is much talk of “taking people out of paying tax” but that is only a part of what these changes mean. For the poorest, these changes mean a stagnant income, not an increase. Anyone with an income below the old tax threshold of £10,600 gains nothing from these measures. For someone on Jobseeker’s Allowance, or working part-time with low earnings, their income will remain exactly the same and they’ll feel worse off as inflation rises.

Lower income workers get the least help.

Those with an income over the tax threshold will see reduced advantage from these measures if they receive benefits like housing benefit or universal credit. As these benefits are means-tested, any increase in net earnings will reduce the benefit proportionally. As an example, someone with an income of £12,000 will pay £80 less tax a year because of the increased tax threshold. However, this means they will be considered to have an income of £80 a year extra for benefits purposes. If they receive housing benefit, they will lose £52 of that benefit. If they also receive council tax support, they may lose a further £16 of that support. So, for this example person, working and receiving benefits, they pay £80 less tax but only end up £12 better off after benefits reduce accordingly.

Those not on benefits receive the full extent of that tax cut. Someone earning £20,000 and not receiving any benefits (or only receiving tax credits) will be better off by the full £80.

Those with incomes over the higher rate threshold will feel the greatest effect of these tax cuts. They receive a bigger advantage from the increased personal allowance, worth £160 to a higher rate tax payer. In addition, the increased higher rate tax threshold is worth an extra £43. They have some extra national insurance to pay but anyone with an income between £43,000 and £100,000 will be better off by £141.50 because of these changes.

So if you work with low paid workers or workers on benefits, these changes to tax thresholds do little to help. If they gain at all, most of the give-away is taken straight back through the benefits system.

National Living Wage

A similar story could be told with the increased minimum wage – the National Living Wage. Workers over 25 stand to gain an extra 50p an hour when the old minimum wage is replaced in April. Even if they do not pay tax or national insurance contributions on this, and many people will, those who receive housing benefit or universal credit alongside council tax support only get to keep 7.5p of that 50p increase.

So, for those on benefits, even those benefit claimants working full-time, tax cuts do little or nothing to improve their circumstances. It is those whose incomes stand alone, without state aid, that gain most from cutting taxes. If we are looking for work incentives for those moving off benefits, tax cuts will do little to help.

Dan Rust, Turquoise Training and Consultancy