Tuesday, April 08, 2008

Most low paid workers better off because of the budget

So how did the budget affect someone who, say, is 30 years old, working full time at the minimum wage, but is a single adult with no kids? Everyone's criticising Gordon Brown for raising taxes on people in low paid work, so they'd be worse off, right?


If you take the income tax, national insurance and working tax credit changes into account, they'll be £7.12/week better off.

The overall effect of the changes in the Budget, including the abolition of the 10p tax rate, the change in the threshold for paying national insurance and the increase in working tax credits, are that most low paid workers will be better off, not worse off.

The substantial increase in Working Tax Credit means that all those who earn from £8,612 (30 hours a week on the minimum wage) up to £13,000 (or up to £17,200 joint income if they are in a couple) are better off. Even if you don't have kids, you can claim working tax credit.

A large group of single childless people earning £225 to £245 a week are able to claim tax credits for the first time. This includes, for example, thousands of retail workers in Tesco, Sainsburys and M&S working a standard week for around £228 a week.

Some people have lost out. People who cannot claim Working Tax Credit because they work less than 30 hours a week or are under 25 years old and who do not have dependent children will be worse off from the abolition of the 10p band. A small group of single childless people who earn between £13,000 and £15,000 a year will lose out by a small amount – less than £1 a week.

The maximum loss for someone who works is £152.40 a year (£2.93 a week). This would be the case for someone working 26 hours a week on the minimum wage, earning £143 a week. But if they could work an extra 4 hours a week, they could (if eligible) claim tax credits of £32.31 a week on top of the extra wages.

Those on average earnings of £29,000 a year are £5 a week better off.


The above stats aren't about trying to make excuses for the scrapping of the 10p tax rate - younger low paid workers and the others living on low incomes who lose out shouldn't be having their tax bills increased, and there's no reason why the working tax credit increases had to be combined with removing the 10p starting rate. A tax system in which people on low incomes paid less and people on high incomes paid a lot more would be a lot fairer.

But the figures do highlight the amount of misinformation that there has been in the coverage of this issue, with claims that all low paid workers will be losing out when that is manifestly not the case.

It also shows how effective tax credits are in boosting the pay of low paid workers. Someone working 30 hours a week on the minimum wage will be paying an extra £2.43/week in tax, but receiving an extra £9.62/week in working tax credit. Abolishing tax credits
, as the Tories seem to be considering, would hammer low paid workers far more than the abolition of the 10p starting rate of tax ever did.

If people working 30 hours/week on the minimum wage had to pay no income tax or national insurance at all, they would be £18.94/week better off. Working tax credit alone is worth £32.31/week, even without considering child tax credits which help families. So scrapping tax credits and just raise the threshold at which people start paying tax would leave most workers on the minimum wage worse off.

Of course, these are theoretical figures, and rely on people claiming working tax credit. You can check if you are eligible by looking here or there is lots of good advice at USDAW's website here

Whatever you think about the budget, please do pass the message on to anyone you know who might be eligible for tax credits and who has found that they are paying more income tax this month that maybe they could be getting a bit more money than they thought they would.


At 7:41 pm , Blogger Matt Sellwood said...

Hey Dan,

Do you not find tax credits enormously bureaucratic, confusing and liable to be missed by the very people they are meant to help (i.e. the most vulnerable)?

I can't for the life of me see how making the tax system massively more complicated helps.


At 7:59 pm , Blogger donpaskini said...

Hi Matt,

Good to hear from you, hope you're well.

Yes indeed, tax credits are bureaucratic, confusing, and the takeup of working tax credit in particular is much lower than it should be. It's an object lesson in why anti-poverty policies need to involve and be designed by the people who they are meant to help, rather than just be drawn up in Whitehall.

But, the other side of it is that tax credits have made an enormous difference in improving the incomes of millions of people. An extra £32/week for a worker on the minimum wage is a massive deal, and there is no simple way of doing that through the tax system.

By coincidence, I was talking to Sian Berry about this just the other week. The Greens' working group on their citizens' basic income policy have been finding that it is difficult to come up with a CBI policy which is a) affordable and b) does as much as tax credits to boost the income of low paid workers. Once Sian is Mayor of London, we'd like to do some work with your party and any others working on CBIs to help try and find an answer to this :)

At 8:57 pm , Blogger Matt Sellwood said...

I look forward to the glorious day!

Am moving to London in a couple of months, so will ensure that Mayor Sian doesn't forget the Don...:)

Best wishes,


At 12:44 pm , Anonymous Anonymous said...

But isn't the point your previous blog?

Surely its not abolition of 10p rate v. less improved tax credits.

It is whether tax generated from abolition of 10p rate is an appropriate way to raise tax revenue, when people on higher incomes are having their tax cut from 22p to 20p?

I take on your points on how little or how much many low income groups gain from the package, but it reminds me a bit of the classic infantile student politics rant of choosing between different social spending when asking where free education comes from. The point is we're choosing between things we don't need to choose between and taking other things out the equation. That is not where the discourse should be and is why so many on the left are so angry about this.


At 12:59 pm , Blogger donpaskini said...

Hi Daniel,

Quite a lot of the responses to the debate about the abolition of the 10p (see comments on previous thread or elsewhere) have been along the lines of 'Labour's made everyone earning less than 18.5k worse off' and/or 'we should just raise the tax thresholds and get rid of these complicated tax credits'.

So alongside a post about how the tax system should be fairer overall, it seems to be also worth pointing out that:

a) most low paid workers will be better off after the budget
b) raising the tax threshold and getting rid of tax credits would penalise lots of low paid workers
c) one important thing, whatever anyone thinks about the budget, is to make sure that people who are entitled to working tax credit actually claim it.

If nothing else, it gives Labour candidates who get asked about this on the doorstep something positive to say.

If you want an analogy with student funding, it's like how we say that all students should get grants and not have to pay fees (and that this should be funded by increased tax revenue from higher earners), but we also argue the separate point against the people who want to do this by cutting student numbers, and make prospective students aware of what financial support is available.

At 4:31 pm , Anonymous Anonymous said...

Fair enough but as I said before....

its not the point is it, unless its a completely separate point?

to compare gain/loss with tax credits with gain/loss from abolition of the 10p rate does convey a false choice. Maybe your response to my comment could have been your original post?


At 9:44 pm , Blogger sanbikinoraion said...

Er, there is a really easy way to make those on minimum wage better off using the tax system. It's called "not taxing them". Someone earning minimum wage full time pays, what, two, three grand in tax, NI and employers' NI?

At 9:44 pm , Blogger sanbikinoraion said...

(ticking box for emails, I always forget...)

At 11:04 am , Blogger donpaskini said...

sanbikinoraion - by 'not taxing them' I'm assuming you mean income tax/NI (rather than indirect taxes). A tax cut for low earners means either:

1. Reductions in public spending
2. Scrapping or scaling back tax credits
3. Increasing taxes for higher earners

I support the third of these, am against the second, and would be very cautious about the first.

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