Richard Holden is MP for North West Durham.
Morrisons, Consett, Co. Durham
Work must always pay and the more you work, the more you should be rewarded. That was the message I received from the 400+ constituents who attended my ‘Jobs, Jobs, Jobs’ fair in Consett and the dozens of employers desperately looking to hire staff. As furlough comes to an end and with record vacancies in the economy work is on the agenda, especially with tax in the news.
It’s clear that our tax and benefits system could be doing better not only at encouraging people, but to work more when they’re in it. There are several related issues here: childcare costs is a substantial one, and we’ve got to look at how it can be delivered at lower cost. But the biggest issue that people have started to raise with me is the marginal rate of tax at certain points in the income scale.
While the main rates of income tax have remained unchanged for some time, other changes have crept in. Some have been hugely beneficial in terms of reducing taxation, but also very costly in terms of revenue – such as raising the basic threshold of income tax much more quickly than inflation.
Someone on the minimum wage now pays over £1,200 less tax than they would have done in 2010 and, due to the living wage, earn about £4,000 a year more. Even adjusted for inflation, these figures are over £1,000 and £2,800 respectively.
The big change to Universal Credit from legacy benefits really helped that “cliff edge”, which had meant that many people would not benefit – some would be left with effective marginal rates of over 100 per cent – at all if they worked over 16 hours a week. The new system is far, far better.
But there are some snags in the system that need fixing at different points and hit in odd ways across the income spectrum. There are real pinch points, and I’ll give three examples of constituents I’ve met over the last eighteen months:
1) The young couple. They’re renting. He’s self-employed earning just over £24,000, she’s working 12 hours a week on the living wage in the evenings when the grandparents look after their two kids. They get Universal Credit of just under £47 a week. The second child has just started school and she’d like to do more hours but the withdrawal rate on Universal Credit is 63 per cent. So for every hour she works at £8.91 an hour she’ll only get an extra £3.29 an hour before other taxes and costs are added on. Doubling her hours would mean getting less that £30 a week extra after tax and costs are added – a marginal combined loss of benefits and tax rate of around 70 per cent. Additionally, because her earnings aren’t high enough she doesn’t qualify for pension auto-enrolment – not great for her long -term prosperity. That should change too.
2.) The couple in their 30s who have just had their first baby. The couple in their 30s who have just had their first baby. She’s a police sergeant earning just over £46,000. He’s taking shared parent leave to look after their second child. They’ve just seen a big income drop as one of them is staying at home, and she’s in line for promotion to Inspector. Because between £50,000 and £60,000 you lose child benefit, her marginal tax rate will end up as 65.5 per cent (rising to 66.7 per cent next year) if she pushes for promotion with the extra responsibility of managing a much larger team. She questions whether the extra stress and responsibility would be worth it for marginal gains.
3.) The local doctor in her late 40s. The local doctor in her late 40s. She’s decided to do four days a week rather than five because she’s looked at what she would earn for the extra work and it’s not worth the trade-off. Working full-time she’d earn £125,000 a year. But because of the withdrawal of the tax- free allowance between £100,000 and £125,140 a year and the 40 per cent rate plus national insurance, she’d end up paying a marginal rate of 62 per cent. As it is, she ends up earning almost 90 per cent of her full-time salary for working four days out of five. And don’t get me started on her colleague who is in his mid-50s, but would end up with a marginal rate of nearly 100 per cent, due to the pension situation, if he worked more than three days a week at the local GP surgery. With waiting lists rising due to Covid, we’ve got to remember that people respond to incentives in our NHS no less than anywhere else.
These very high marginal rates kick in unevenly across the income tax spectrum and are even more acute when it comes to recent graduates, an issue I have raised before in this column.
The Chancellor has been right to make the difficult long-term decision to right the ship and the public finances post-Covid. But as we recover, we also need to look at how we smooth our tax and benefits system to ensure that work always pays.
Chatting to people out and about in North West Durham, a basic rule of thumb comes to mind and seems universally accepted: you should be able to keep at least half of every extra pound you earn. I think that this is right.
Whether it comes to those just starting out or those doing well in their careers, working more should always pay more. While it obviously cannot happen overnight, a sensible principle to put in place would be that no-one should be losing more than 50 per cent of every extra pound they earn.
This would be a sound principle to establish and work towards over time – especially for those starting out and looking to the future. Whether people are benefiting from Universal Credit or are higher rate taxpayers, it’s important that work pays, providing for your family is encouraged, and the new party of working Britain always rewards those who do the right thing.