THIS BLOGPOST IS NO LONGER UPDATED AND THE FIGURES IN IT SHOULD NOT BE RELIED ON. IT HAS BEEN REPLACED
UPDATE 9 MARCH 2017
In his Spring Budget, 8 March 2017, Phillip Hammond confirmed that the tapered loss of this benefit was a tax. He confirmed the reduction in the taper rate by saying "the Universal Credit taper rate will be reduced in April from 65% to 63%, cutting tax for 3 million families on low incomes."
UPDATE 24 NOVEMBER 2016
In his Autumn Statement on 23 November 2016 Chancellor Philip Hammond announced that the taper rate for Universal Credit would be reduced from 65% to 63% from April 2017. That will make very little difference to the figures in this blogpost paper. In the final calculation it allows claimants to keep 80p of every pound earned rather than 81p. The calculation is shown at the end of this blogpost. It will be fully updated in April 2017.
UPDATED 11 APRIL 2016
The latest council tax support details have been published and are incorporated in the blogpost.
Householders who get the new means-tested benefit called Universal Credit could keep just 19p of every pound extra they earn – an effective tax rate of 81%. In some parts of England it could be more - losing 82p to 83p in every pound that is earned, leaving them with 18p to as little as 17p for every extra pound they earn. Those losses are similar to many under the present system and could undermine the work incentives which the new system is designed to create. And for graduates on incomes above £17,495 but low enough to get Universal Credit, the deductions would be more, adding about 2.5 percentage points to those figures. Worst case would be earn £1 keep 14.5p.
Universal credit
Universal Credit is being rolled out from October 2013 to replace six means-tested benefits and tax credits. It is paid to people on low incomes who cannot work, are looking for work, or work on very low pay.
It is supposed to let people keep more of what they earn and thus boost incentives both to return to work and to earn more once in work. For every £1 extra earned the credit will be reduced by 65p allowing the claimant to keep 35p. This so called ‘withdrawal rate’ of 65p in the pound is said to be much lower than rates under the present system and allowing them to keep 35p of what they earn is seen as an incentive to work. The Government says that is a big improvement on the current system where a combination of different rules and tapers can lead to individuals losing more than more than 90p in the pound if they pay tax and their means-tested benefits are cut.
However, that figure of 65p withdrawal rate is only accurate for people who earn less than £155 a week and are not householders.
Taxpayers
Universal Credit is worked out after tax and National Insurance have been deducted. In 2016/17 anyone earning more than £155 a week will pay National Insurance and once they earn £212 a week income tax begins. Someone paying National Insurance will lose 12p in the pound before their Universal Credit is worked out. The total loss from NI and reduction in Universal Credit is 69p from each £1 they earn. So they keep 31p. If they pay income tax as well they lose just over 76p of each pound and keep just under 24p. Those figures were originally confirmed by Pensions Minister Steve Webb in Parliament in 2012. (Hansard, House of Commons, 11 September 2012, col.196).
But that is only part of the picture.
Householders
Universal Credit, despite its name, does not replace all means-tested benefits. It does not include the means-tested reduction in council tax which used to be called Council Tax Benefit but since 1 April 2013 has been replaced by a very similar scheme called Council Tax Support which is operated by local councils. Like all means-tested benefits Council Tax Support is withdrawn as income rises. The standard taper is 20p for each £1 rise in net income (after tax, NI and Universal Credit). In other words for each extra pound of net income help with council tax is reduced by 20p. The result is that for each £1 earned a total of 81p disappears in tax, NI, reduced Universal Credit, and reduced Council Tax Support. The calculation is at the foot of this blogpost.
Localism
In some areas of England and Wales the reduction for every £1 of income earned may be even higher. As part of the transfer to local councils the Government has cut the money it currently pays towards help with council tax. From 1 April 2013 councils get 90% of the money they got to pay Council Tax Benefit. The Government has already said that out of that reduced budget they will have to pay exactly the same benefit to anyone over pension age. Nearly half of all Council Tax Benefit recipients are pensioners so the other half – working age people who can claim Universal Credit – will bear the whole of the funding cut. That will mean a reduction for them of between 19% and 33% according to the Institute for Fiscal Studies (www.ifs.org.uk/comms/comm123.pdf chapter 5).
Councils have now published the details of their schemes for the fourth year of local council tax support. In 2016/17 the great majority are keeping the taper at 20%. But 18 have a higher taper. Five - Brent, Doncaster, Harrow, North Kesteven, and Trafford - have raised it to 30%; another 11 to 25%, and one each to 23% and 21%. Only three (Brentwood, Mid Sussex, and Wiltshire) have cut it to 15%. See http://counciltaxsupport.org/schemes/
In areas which raise the Council Tax Support taper to 25% householders on Universal Credit who pay tax will find that 82p of each pound earned disappears in deductions. In areas with a 30% taper they will lose 83p and keep just 17p for each extra pound earned in income tax, National Insurance, reduced Universal Credit and reduced Council Tax Support. In the three areas where the taper is 15% people will lose 80% of each extra pound. Students on plan 1 or plan 2 who pay in effect an extra 9% tax lose 85.5p in the extra pound keeping just 14.5p.
Conclusion
Losing more than 80% of each extra pound you earn is hardly an incentive to work or to work harder.
You can read the 11 September 2013 parliamentary debate on Universal Credit here
CALCULATION OF TOTAL DEDUCTIONS FOR A TAXPAYER HOUSEHOLDER
FOR EACH £1 OF EXTRA INCOME WITH 20% COUNCIL TAX TAPER
| EARNS EXTRA | £1.00 | |
| Tax | 20% | -£0.20 |
| NI | 12% | -£0.12 |
| Net after tax | £0.68 | |
| UC reduction | 65% | -£0.44 |
| Net after UC | £0.24 | |
| CTS reduction | 20% | -£0.05 |
| NET GAIN | £0.19 | |
| Effective 'tax' | 81% |
CALCULATION OF TOTAL DEDUCTIONS FOR A TAXPAYER HOUSEHOLDER
FOR EACH £1 OF EXTRA INCOME WITH 20% COUNCIL TAX TAPER SHOWING EFFECT OF 63% UC TAPER FROM APRIL 2017
EARNS EXTRA
|
£1.00
| |
Tax
|
20%
|
-£0.20
|
NI
|
12%
|
-£0.12
|
Net after tax
|
£0.68
| |
UC reduction
|
63%
|
-£0.43
|
Net after UC
|
£0.25
| |
CTS reduction
|
20%
|
-£0.05
|
NET GAIN
|
£0.20
| |
Effective 'tax'
|
80%
|
9 March 2017
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