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.

Duncan Exley, Director of The Equality Trust, said:

“Our system of taxes and benefits takes money away from the poorest working families almost as fast as they earn it, but allows the richest 1 per cent to keep the majority of the money they earn.

“The new system will be even worse. For all the talk of Universal Credit ‘making work pay’ it does nothing of the sort in its current guise. In fact, many recipients will keep even less of what they earn than under the current system of tax credits. So it fails on its own terms, and leaves the poorest running up the down escalator, struggling to keep pace with others.

“We can’t keep pretending that our taxes and benefits system is fair when the rich are given all the ladders and the poor all the snakes.  The system doesn’t help the ‘aspirational’ hard-working families we often hear politicians talk about. If anything it’s an Aspiration Tax.”

“Most people believe the poorest working families should keep more of the money they earn. If Universal Credit is to work, it needs to acknowledge this, and take away far less of people’s income, as they earn more.

“A good way to achieve this would be to halt the planned increase in the personal tax allowance threshold, which is far less effective at supporting the poorest, and to instead reduce the withdrawal rate of Universal Credit from 65p to 55p. This is a fairer system that would incentivise work, support the poorest, and would help to reduce the vast and extreme levels of economic inequality seen in the UK today.”

Notes to editors

1. Ipsos MORI surveyed a quota sample of 2,246 adults aged 16-75 in the United Kingdom from 27th November – 2nd December 2015 using its Online iOmnibus. Quotas were set on and the survey data were weighted according to the known population profile of the UK for age, gender, region, social grade and working status.

2. Participants were asked to think about a situation involving a working parent who currently is entitled to and receives tax credits and whose gross annual income from their employer is £10,600. They were then instructed to imagine that this working parent earned an extra £1.  Participants were first asked how many pence of this extra £1 they think this parent gets to keep, after tax and National Insurance have been deducted and their tax credit entitlements decrease. They were then asked how much they think this parent should get to keep, after tax and National Insurance have been deducted and their tax credit entitlements decrease. For these two questions participants were not presented with figures relating to how much working parents in this situation currently get to keep.

3. Averages cited refer to median scores.

For more details contact info@equalitytrust.org.uk