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How our social security system holds back low-paid workers

How our social security system holds back low-paid workers

Britain’s poorest working parents lose more of their earnings through taxes and social security withdrawal than the richest 1 per cent, and should be allowed to keep more of the money they earn.

Our report, 'The Aspiration Tax: How our social security system holds back low-paid workers' shows the high marginal tax rate faced by low income, working parents receiving tax credits, how this rate will increase under the new social security system of Universal Credit, and how this rate is far higher than someone in the richest 1% can expect to pay. This means our systems of taxation and social security are both unfair and ineffective, with low income families disincentivised to work, and unfairly penalised.

The report finds:

  • Working parents currently receiving tax credits lose 73p of every additional pound they earn through taxation and withdrawal of benefits. Under the new system of Universal Credit being rolled out, this will rise to 76p.
  • Someone in the richest 1%, earning £150,000, loses just 47p, a difference of 29p per £1 earned.

Research carried out online by Ipsos MORI on behalf of The Equality Trust found:

  • When asked how much a working parent receiving tax credits (someone who will be eligible for Universal Credit) should get to keep of every extra £1 they earn, 83% of adults aged 16-75 in the UK gave an amount which is more than that which they actually keep.
  • On average people believe that a working parent earning £10,600 from their employer and receiving tax credits (someone eligible for Universal Credit), currently keeps 50p of every additional £1 that they earn. People believe should get to keep 75p on average. Analysis by the Equality Trust found they actually keep just 27p
  • Ipsos also asked people for their opinions on Universal Credit specifically. When told how much a working parent receiving Universal Credit gets to keep of every extra pound earned (24p), 70% believed this was too little (23% said 'somewhat too little, 47% said 'far too little'). This suggests a widespread lack of support for the reform, as it stands.
  • When told how much working parents actually get to keep, 59% of adults believe that after tax and other deductions were accounted for, a working parent earning £10,600 and receiving tax credits should get to keep more from any additional pound of income they earn than one earning more than £150,000.

This report calls on Government to reduce the burden on poor working families by reducing the amount of money it withdraws from them under Universal Credit as they earn more. The current withdrawal rate of 65p of every extra pound earned should be reduced to 55p. This would provide an income boost of £127 per month to a working household on the average wage. Implementing this would cost £4 billion a year, and could be paid for by halting the increase in the personal tax allowance, which fails to support the very poorest.

This is an executive summary of the Equality Trust's latest paper The Aspiration Tax: How our social security system holds back low-paid workers. You can download it here.

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