Families who are struggling in working poverty face a tax rate of 70% if they take on extra work. This injustice is exposed in new research published today (3 February) by the Equality Trust. In this guest blog, Tim Stacey, Senior Policy and Research Advisor at the Trust, explains how the ‘Aspiration Tax’ affects people.
Most children who live in poverty live in a family where someone works. That may sound unlikely, but it is the reality of the low-pay Britain we see today. One in 20 employees are only paid the legal minimum, an amount that is often not enough to live on. But this isn’t the only problem. These low wages are made even worse by Government policy, which prevents people on low incomes from keeping a decent amount of what they earn.
In fact, research from the Equality Trust shows that families on tax credits, who are amongst the poorest working families, often lose over 70p of every extra £1 they earn.
In our report, The Aspiration Tax: how our social security system holds back low-paid workers, we’ve looked at how the tax and social security system affects families on low incomes, where someone works. What we found was that they get to keep very little of the money they earn. They are often paying income tax and national insurance contributions which take 32p of every extra £1 earned. On top of this, they lose out from having their tax credits withdrawn. This means that a family with one person earning £10,600 loses 73p of every £1 they earn over that amount. This actually gets worse under the new Universal Credit system, where that household would lose 76p for each £1 that they earn.
When a family keeps so little of their wages, it can be incredibly difficult for them to earn enough to exit poverty. If you only keep 24p of every £1 raise you get, then you have to work even harder and even more hours than you would otherwise just to make ends meet.
This is a barrier that the Government puts in the way of the poorest, and one that often traps them in poverty.
But it stands in stark contrast to the support they offer to those who are rich and who want to increase their fortunes. The richest 1% keep 53p of every extra £1 of income they get, over twice as much as low-income households on Universal Credit.
Unsurprisingly, this is deeply unpopular with the public. Research we conducted with Ipsos MORI found that…
- 83% of the public believes that families on tax credits should keep more than the 27p of each pound they currently keep.
- On average, people believe that parents on tax credits should get to keep 75p of every £1 that they earn.
- Most people think that a working parent earning £10,600 on tax credits should keep more of every £1 they earn than someone in the top 1% paid £150,000 – rather than the other way round, as it currently is.
- When those interviewed were told what someone kept from their earnings while on Universal Credit, 70% thought this was too little.
If the Government were to reduce the rate at which they claw-back Universal Credit just slightly, then it could lift over 90,000 children out of poverty. This could be paid for by cancelling planned increases in the Personal Allowance, which overwhelmingly benefits richer families. The Government should act now if its flagship welfare reform of Universal Credit is to help people out of poverty, rather than trap them within it.
The Equality Trust works to improve the quality of life in the UK by reducing economic inequality.