Tax credits and benefits play a crucial role in preventing in-work poverty

By agency reporter
14 Feb 2014

New research published by the Trades Union Congress (TUC) today (14 February)) shows that tax credits and benefits play a crucial role in lifting low-paid workers out of poverty.

More than five million workers across the UK earn less than the living wage (£8.80 in London and £7.65 in the rest of the UK). The TUC says that their pay needs to increase as growth returns, and that every employer who can afford it should adopt the living wage as a minimum.

But analysis by economist Howard Reed for the TUC shows that low-paid workers need both decent pay rises and help from tax credits and benefits if they are to make ends meet.

Low-paid families with children are in particular need of tax credit and benefit help as their extra outgoings are unlikely to be met by the living wage alone. With most welfare cuts hitting people in work, the TUC is warning that the fight against in-work poverty needs both better pay and decent benefits to succeed. Even with pay rises, low earning households need benefits to survive.

The TUC research features a range of fictional households to show the importance of wages, in-work benefits and tax credits. It also shows that further increases in the personal income tax allowance will have limited impact for many low-wage households (as they only pay income tax on a small proportion of their earnings, if at all) and that in-work benefits are a far more important was to increase the incomes of low earning families than tax cuts:

- Jean lives in Manchester and is a single parent with two children. She works 40 hours a week in a minimum wage cleaning job, and pays £100 a week in rent. Jean has a pay boost when her employer decides to pay the living wage, receiving an extra £45.60 a week. As her pay goes up, she pays an extra £9.12 in income tax and an additional £5.47 in national insurance each week, but her benefits also change as a result of her pay rise and she loses £18.70 a week in working tax credit. This means she gets a welcome £12.31 extra a week in her pocket, but her earnings are still too little to cover her rent and her family’s living costs. That’s why even after the pay rise, it is vital that Jean is still entitled to £166.53 a week she was getting in child benefit and tax credits.

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Mark and Heather live in Stratford, East London and have two young children. They own their terraced house, and spend £200 a week on their mortgage and £120 a week in childcare. Mark works 40 hours a week as a security guard, earning £8 an hour. Heather works part-time as a shop assistant for 24 hours a week. Both Mark’s and Heather’s employers decide to pay the London living wage. This means that Mark’s earnings increase by £22 a week and Heather gets a £53.70 a week pay rise. In total, their earnings go up by £75.76 a week, although as a result their income tax and national insurance contributions also rise, while their benefits and tax credits reduce slightly. In total, their pay rise means that they are £22.08 better off a week. The pay rises help Mark and Heather out a little but without extra help their income is still too low to cover their living costs, and they still need £148.36 a week in benefits and tax credits. Without this help their income would fall substantially as Heather would not be able to cover the childcare costs that allow her to work.

- Jessica lives in Margate with her two children and works 24 hours a week as a care assistant on the minimum wage. Her rent is £110 a week, which pays for a two bedroom flat and her childcare costs are £170 a week. Jessica’s employer increases her hourly pay to the living wage, which raises her earnings by £27.36 a week. Because of the higher pay, her national insurance contributions rise by £3.29 a week, but her housing benefit falls by £8.36 and her working tax credit entitlement declines by £11.21 a week. Her original pay rise is valuable and as a result Jessica has £4.50 a week more to spend (£234 a year). But at the same time, benefits and tax credits still make a bigger contribution to her household income than her earnings, and she continues to receive £170.78 a week in working tax credit – in addition to child tax credit and child benefit to help with the costs of clothes, nappies and food.

- Fatima and Ali live in Glasgow with their children. Ali works 40 hours a week in a restaurant, earning just above the minimum wage, while Fatima looks after their children. Ali’s employer starts to pay the living wage, which means that Ali’s earnings rise by £38 a week. As a result his income tax also goes up (by £7.60 a week), as do his national insurance contributions (by £4.56). Higher earnings also mean that some of the benefits and tax credits his family receive are reduced, with their housing benefit falling £6.67 a week and their working tax credit by £15.58. Overall, the pay rise is worth an extra £3.59 a week to Ali and his family (£186.68 a year) but Ali and Fatima continue to receive £217.68 a week in benefits and credits. This allows them to cover their £125 a-week rent as well as school uniform and food costs.

The TUC says that tax credits and benefits are vital to hardworking low-income families with children – and in particular for single parents with childcare needs who would not be able to work without them. They must go hand-in-hand with pay rises to lift working people out of in-work poverty. With more than half of benefit cuts hitting working people, any real programme to lift the low-paid out of poverty and enable them to share in the recovery needs increases in pay and a reversal of recent cuts to in-work benefits.

TUC General Secretary Frances O’Grady said: “The economic crash has led to the longest decline in living standards since the 1870s. Britain needs a pay rise but we must also defend and extend the in-work benefits that lift families – particularly those with children – out of poverty. The best way to make work pay is not only to spread the living wage, but also to reverse cuts in tax credits and make Universal Credit more generous for the working poor.”

[Ekk/4]

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