This week has been hailed by the Chancellor as the week he ‘makes work pay’ for ‘hardworking people with jobs’. From now on, everyone in the UK will be able to earn up to 10K tax-free, as the Government significantly raises the income tax threshold for a third year in a row.
Over the past decade in-work poverty has soared, leaving sixty six per cent of poor children now living in households where someone works.
For these low paid families, many of whom Barnardo’s works with, benefits are a lifeline enabling them to provide essentials for their children where a job alone simply doesn’t pay. A working mother of two told us recently, for example, that benefits made the difference between being able to buy milk for her child or not; another working mother, who did not qualify for benefits, told us she had been driven to using food banks to prop up her wages.
Over the past three years, the Government has increasingly been trying to solve the crisis of in-work poverty by tinkering with the level at which people pay income tax. In fact, since 2010 they’ve raised the threshold by over 50% percent from £6.5K to £10K; it’s a sensible sounding plan that should, in principle, help low earners keep more of the money they earn.
In practice, however, many of the lowest paid families will see next-to-no extra cash in their wallets from the scheme.
Partly this is due to a lack of joined-up thinking by the Government, about the way the scheme will work with the Universal Credit benefit system that is currently being rolled out around the country. The new welfare system allows people to work and earn, but as their income increases, their benefits will gradually be withdrawn or ‘tapered’. Under the current taper levels, low paid families will gain money from the tax change, simply to find their benefits subsequently reduced.
As it stands, a lone parent family on minimum wage may see just £39 extra per year from the measure. Meanwhile, the same family on a higher wage would gain £278 per year - around seven times more than the lower earner.
Meanwhile the people most desperately in need of a solution to in-work poverty, those who earn under the threshold, will not see a penny extra from these tax changes.
All the signs are the Coalition has still more enthusiasm for pushing up the personal allowance, with plans in the pipeline to increase it to as much as £12k in future.
If the Chancellor is really going to ‘make work pay’ with this scheme, then he must make sure it boosts the incomes of the UKs lowest paid workers. He can do this by adjusting when the benefits ‘taper’ kicks in, so that families can keep more of the money they gain from the tax changes.
With the Government still committed to end child poverty by 2020, and determined to sell a rhetoric of work as a route out of poverty, it’s crucial that policies work together to raise the take home incomes of the poorest paid families in the UK.
Neera Sharma is Barnardo’s Assistant Director of Policy and Research.