The Coalition Government's flagship policy on raising the income tax threshold to £10,000 has proven to be both expensive and popular. Its stated purpose is to put more money in the pockets of those with low-income jobs, but will it?. Ben Morgan, Oxfam's UK Poverty Advocacy and Policy Officer, looks at what affect raising the tax threshold will actually have.
Raising the income tax threshold to £10,000 - it's a flagship policy to help all people in work, including employees on low pay. Yet, because of the way the social security system works, people on low incomes won't really gain anything. The government can fix this problem by making a simple change to the system.
A good idea, surely?
It seems like a great idea. Ignoring all the other taxes for one rhetorical moment, the Coalition is taking people 'out of tax altogether', creating a '0% tax'.
This policy is both expensive and popular. No wonder it is trumpeted loudly by the Coalition parties.
There's actually a lot to recommend it.
For one thing, it is a change that helps everyone. At a time when means testing is increasing, universal measures are precious and rare. Without some 'universality', tax and social security systems tend to increasingly get in the way of people's attempts to work their way out of poverty. This debate seems academic, but it's a real concern in Britain.
It's also a policy boldly sold on the notion that it helps low-paid workers. It shows Westminster politicians still feel under pressure to tackle Britain's poverty crisis, even if appetite among top politicians for bold progressive action often seems decidedly abstemious.
Finally, it's always heartening to see a promise delivered, and delivered early!
So what's the problem?Taking people out of income tax isn't benefiting many families on low incomes right now because the very act of cutting their income tax means they lose benefits as their net income rises.
Firstly, there are a couple of commonly understood downsides.
Raising the point at which people start paying income tax doesn't help the 'squashed bottom' who don't earn enough to pay income tax in the first place.
Also, if you earn an amount between where the threshold was and where it is going to be, you get less of a tax break. That's why the Resolution Foundation would prefer the Coalition simply invest in tax credits.
So, it doesn't help everyone experiencing poverty and the gains aren't always evenly distributed. Aside from that though, it puts money back in the pocket for the three million low-paid employees lifted out of income tax, right?
Sadly, that's not the reality.
Taking people out of income tax isn't benefiting many families on low incomes right now because the very act of cutting their income tax means they lose benefits as their net income rises.
Citizens' Advice calls this a 'self-defeating roundabout' of giving with one hand and taking with the other. This often means there is little financial sense in going to work. Citizens Advice have analysed how much people really gain. They say increasing the income tax threshold to £10,000 provides £17 extra a year for the lowest paid. By contrast, a couple earning £60,000 will
receive £224 a year.
Cash goes in one pocket and out the other, as those on council tax benefit and housing benefit lose 85% of what they were meant to gain from being taken out of income tax.
Who will lose out?
Those who stand to lose certainly aren't the curtain-shrouded shirkers of Westminster-bubble folklore. We're talking about almost all low-income families, as well as many middle-income families in the private rented sector. Incidentally, families fare a lot worse than single people because families tend to need housing benefit and council tax benefit.
Take a family with two children, with one person working full time on the minimum wage, who pay more than £55 rent a week (a family of four would struggle to find a cheaper rent than this). They would receive just 32p a week.
Those who don't need these two benefits will get £2.15 each week. That's almost 7 times more.
One solution would be for the system to ignore the relevant new net income when calculating the housing benefit and council tax benefit.
One simple solution would be for the system to ignore the relevant new net income when calculating the housing benefit and council tax benefit (a 'disregard' in the technical language). This is easy to arrange, and happens regularly elsewhere in the UK's social security system. This would cost money, but would ensure everyone feels the benefit of raising the income tax threshold.
The Coalition Government is within 'touching distance' of meeting its promise of raising the amount of earnings at which people start paying income tax. The Chancellor now plans to fulfil this promise in 2014, a year earlier than planned. Perhaps he should hold off, so he can ensure that by 2015 this flagship policy is in line with the needs of struggling working people.
Surely, no new increases in the threshold beyond £10,000 should occur until everyone in work actually benefits from this policy. Also, reintroducing the 10p tax rate, as it previously constituted, won't help. The same basic problem applies.
People on low incomes in Britain face a dark decade, as they are asked to help shoulder the burden of closing the deficit. On the rare occasion people working on low incomes are promised a break, it's only fair that they receive it.
Image credit: Images_of_Money
More on Oxfam's work on UK poverty
Chris Jonhes, Oxfam's UK Poverty Programme Director reviews The Great Tax Robbery by Richard Brooks
Read our media briefing, How Tackling Tax Evasion Could Help Overcome Poverty in the UK