Do tax cuts help the low-paid?

On the Guardian website today, the figures on their piece looking at what the budget means for various households were provided by me, in conjunction with Stepchange Debt Charity. The key information from the piece is that the tax cuts that will take effect from April have very different impacts on people with benefits than on people without.

The piece did not cover the benefit changes happening over the next year – reductions to the benefit cap, cuts to housing benefit for new claims from families, cuts to the universal credit work allowance, not to mention changes to the assessment criteria for personal independence payments which mean cuts of millions for some people with disabilities. All of these things are extremely important and deserve to be looked at independently.

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. The immediate impacts on the majority of people are:

  • 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

Even 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.

For those not on benefits they 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.

For those with incomes over the higher rate threshold, these tax cuts have the biggest effect on them. They receive a bigger advantage from the increased personal allowance. It’s worth £160 to a higher rate tax payer. 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.

National Living Wage

So if you are, or if you work with, low paid workers or workers on benefits these changes to tax thresholds do little to help. Most of the give-away is taken straight back through the benefits system. 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, if they receive benefits that 50p increase becomes a 7.5p net pay increase per hour.

For those on benefits, even those benefit claimants working full-time, tax cuts do little or nothing to improve their circumstances