The truth about tax credits

We published an article by James Ferguson a few weeks ago pointing out that it is entirely possible for a family on tax credits to work very few hours a week but still take home an income similar to that of a junior barrister or doctor. Several readers have taken issue with this.

The tax credit and benefit system is ridiculously complicated (the easiest way to check all benefit entitlements is to use this website) so rather than bicker back and forth on it we are looking at some worked examples.

Here’s the first – a family with three children living near Devizes in Wiltshire. One parent works 24 hours a week at £7 an hour (the magic number when it comes to tax credits). The other does not work.

The family’s total earned income comes to £8,700 (take-home pay is £8,623 after NI). Their tax credits come to £11,930.10. Their council tax assistance is £685.33 and their Housing Benefit comes to another £6,950. On top of that they get child benefit of £2,501.20. That gives a taxpayer-funded benefits total of £22,067.63 (£424.31 a week).

Add that to the earned income and you get £30,690.53. That money is tax free. If it were earned in the free market by someone not in receipt of benefits it would equate to a pre-tax income of just over £40,500. Junior doctor levels? Yup.

Here are several other examples (thanks to our web researcher, Marina Gerner). A family, again with one parent working for 24 hours a week on £7 an hour, and the other parent not working at all, would earn the following:

With no kids: Pay is £8,700 (take-home pay is £8,623 after NI). Council tax help £492.19. Housing benefit £6,706.26. Total benefits (£7,198.45 per year/ £138.38 a week) plus actual earned money comes to a net £15,821.45. If it were earned by a single earner, non-benefit recipient, this would equate to a pre-tax income of about £18,750.

With two kids: Pay is £8,700 (take-home pay is £8,623 after NI). Total tax credits £9,114.06. Council tax help £432.91. Housing benefit £6,472.35. Child benefit £1,788.80. So total benefits (£17,813.12 per year/ £342.52 a week) plus actual earned money comes to a net £26,436.12. If earned by a single earner, non-benefit recipient, this would equate to a pre-tax income of about £34,500.

With five kids: Pay is £8,700 (take-home pay is £8,623 after NI). Total tax credits £17,458.86. Council tax help £753.38 Housing benefit £7,831.89. Child benefit £3,926.00. So total benefits (£29,970.13 per year/ £576.27 a week) plus actual earned money comes to a net £38,593.13. If it were earned by a single earner, non-benefit recipient it would equate to a pre-tax income of about £54,000.

Let’s take a different scenario. A two-parent family, with each working 35 hours a week, on £7 an hour.

With no kids: Joint gross pay is £25,382, which gives net take-home pay of £23,434.  No tax credit or benefits.

With two kids: Joint gross pay is £25,382, which gives net take-home pay of £23,434. Total tax credits £3,023.82. No council tax help but housing benefit is £795.98. Child benefit £1,788.80. So total benefits (£5,608.60 per year/ £107.86 a week) plus actual earned money comes to net pay of £29,042.60. This equates to a pre-tax household income of around £33,600, assuming that each partner gets paid the same (roughly £16,800 each).

With three kids: Joint gross pay is £25,382, which gives net take-home pay of £23,434.  Total tax credits £5,805.42. No council tax help but housing benefit is £1,249.16. Child benefit £2,501.20. So total benefits (£9,555.78 per year/ £183.76 a week) plus actual earned money comes to net pay of £32,989.78. This equates to a pre-tax household income of around £39,500, assuming that each partner gets paid the same (roughly £19,750 each).

With five kids: Joint gross pay is £25,382, which gives net take-home pay of £23,434.  Total tax credits £11,368.62. No council tax help but housing benefit is £2,155.52. Child benefit £3,926.00. So total benefits (£17,450.14 per year/ £335.58 a week) plus actual earned money comes to net pay of £40,884.14. This equates to a pre-tax household income of around £51,000, assuming that each partner gets paid the same (roughly £25,500 each).

One parent working for 24 hours a week on £7 an hour Two parents each working 35 hours a week on £7 an hour
Number of children 0 2 3 5 0 2 3 5
Gross pay £8,700 £8,700 £8,700 £8,700 £25,382 £25,382 £25,382 £25,382
Take-home pay after NI £8,623 £8,623 £8,623 £8,623 £23,434 £23,434 £23,434 £23,434
Tax credits £0 £9,114.06 £11,930.10 £17,458.86 £0 £3,023.82 £5,805.42 £11,368.62
Council Tax help £492.19 £432.91 £685.33 £753.38 £0 £0 £0 £0
Housing Benefit £6,706.26 £6,472.35 £6,950.00 £7,831.89 £0 £795.98 £1,249.16 £2,155.52
Child Benefit £0 £1,788.80 £2,501.20 £3,926.00 £0 £1,788.80 £2,501.20 £3,926.00
Total benefits £7,198.45 £17,813.12 £22,067.63 £29,970.13 £0 £5,608.60 £9,555.78 £17,450.14
Total net income £15,821.45 £26,436.12 £30,690.53 £38,593.13 £23,434.00 £29,042.60 £32,989.78 £40,884.14
Equivalent pre-tax income  £18,750.00 £34,500.00 £40,500.00 £54,000.00 £25,382 £33,600 £39,500 £51,000

 

Look at these examples, and at the numbers in bold (the effective gross pay) in particular, and you will see something shocking. In most cases the effective gross pay of the family working 24 hours a week is higher than that of the family working 70 hours a week. And the net pay ends up slightly lower for the skivers than the hard workers – but only very slightly. In the end, the effect is that for every hour past the first 24 hours a week, the working couple (who let’s not forget are working nearly three times as many hours as the other lot) are between them getting an effective extra take-home wage of just £1 or so per hour.

We haven’t just made these numbers up for political effect. They are what they are. That’s something that explains an awful lot about the UK. It explains just why so many people work part time (why wouldn’t you?) and it makes a damn good start at explaining why our welfare bill is so utterly out of control.

We aren’t encouraging people to work full time in productive jobs – and to work their way up within them paying tax as they go. No, we are actively incentivising people to take low paid part time jobs and to stay in those low paid part time jobs, taking benefits as they go. The way the system works, they’d be crazy not to. After all, there aren’t many things you can do that make you £50,000 plus for working 24 hours a week.

 

  • Tamara

    a junior doctor would be earning all that money alone not as a couple.. The 22k household income is for a couple plus 3 kids, and they have worked to earn some of it..
    people need to take into consideration that there isn’t enough jobs for everyone out there. And people rely on these benefits as it stands, so taking away their household income all of a sudden just wouldn’t be right.

    • Peter Raams

      Try reading the article. Paragraph 3: “One parent works 24 hours a week at £7 an hour (the magic number when it comes to tax credits). The other does not work.”

      • Tamara

        Sorry I meant one of them have worked for some of it!

  • Ellen

    This does seem excessive if it is true. Can you do the maths for a couple with one full time earner and three children where the working parent earns £70000 and who pay a similar rent

    • Thomas

      Let’s compare the first example where one parent working 24 hours a week at £7 an hour (£8,700pa) yields a net income of £30,690

      I have used the income tax calculator here:
      http://www.moneysavingexpert.com/tax-calculator/

      Couple with one parent earning £70,000:
      – Net pay £47,926 + £0 Child Benefit

      Couple with one parent earning £60,000:
      – Net pay £42,126 + £0 Child Benefit

      Couple with one parent earning £50,000:
      – Net pay £36,326 + £2,501 Child Benefit = £38,827

      • Ellen

        If tax and benefit policy disadvantages the likes of junior doctors in this way, they will leave – especially as they plan on reintroducing the ‘bad old days’ of 80 hour work weeks for them. It is a pity they didn’t take the same line with bankers – maybe they would have emigrated and found someone to pay them shed loads more money.

        It looks like tax policy tries to decide what each person gets – not what each person earns, and re distributes one persons taxes to another persons benefits.

        • Thomas

          “It looks like tax policy tries to decide what each person gets – not
          what each person earns, and re distributes one persons taxes to another
          persons benefits.”

          That’s a good summary – for families with children, at least.

  • Yvonne Spence

    These figures are interesting, but there is one major flaw with the examples of families being compared with a junior doctor. These figures all include child benefit, which a junior doctor on £40,500 would also be entitled to if he or she was a parent. The threshold above which child benefit is removed is £60,000. While child benefit is not as high as the amount of family credit in the examples given here, its inclusion distorts these figures and so should not have been included.

    • Thomas

      I agree with you, which is why I posted the figures above including the effect of Child Benefit.

      However, even once Child Benefit is included the figures are still shocking: if the family with the one earner at £8,700 were able to increase this individual’s pay to £60,000, their net income would increase from £30,690 to £42,126. That’s £11,436 net income for £51,300 gross – effectively a 78% tax rate.

      • David Illingworth

        Most low income families have effective tax rates of close to 100%.

  • Bimnk

    I’m a single father been working my socks off the last few years as i just couldn’t be bothered dealing with the state and claiming benefits, i also presumed working paid more

    Anyway i’m tired of the daily grind and decided to take it easy for a year and work part time and live off my savings, so i applied for child/ tax credits and they started putting £170 a week into my bank.

    Thinking this should be a monthly figure i called them saying there must be a mistake and there has been an over payment … the guy looked into it and said all is correct … as i am sick to death of being priced out the property market i really cannot be bothered going back to work full time knowing i’d be far better off not working.

    This will all end very badly.

    • Engineersareunderstimated

      I was a single earner in a family with two children earning 60K. The loss of the child benefit was effectively a loss of 3.5K income as I as in the 40% TAX bracket. The marginal TAX rate in the 50K-60K was nearly 70%. I had enough of PAYE and went self-employed. I am now able to employ my wife utilize her non-taxable earnings which I couldn’t previously do and I can claim Child benefit again! The TAX system in the UK is not fit for purpose and is exceptionally regressive on those try to make a difference for their family.

  • Calzo

    What this discussion really needs is figures on the number of families or people who fall into each grouping/category to decipher what’s really going on.

    • We did all that in 2010; more folk were claiming than the number paying in. The #tories said they’d address it – instead, these payments have escalated. Look now at the population increase for why; more residents + workers equates more state demand.

      • Calzo

        Maybe. My general point is that merely illustrating that it is possible to ‘milk’ the system doesn’t say anything to the extent that it is happening.

  • Marc Cram

    A junior doctor will only earn that after many years of experience, and will have to work night shifts, weekends and public holidays. Not only that, they have to pay a lot of expenses such as insurance, memberships, exams just to stay in the job.

  • Paul Mawer

    Great numbers,fascinating so if this top rate was achieved less than 250k of people would receive tax credits

  • Bandages_For_Konjic

    It might help if Marina Gerner showed her working. If I run the example cited above – 2 parent household, 1 parent working, earned income £8,700, social security benefits £10,136.53 p/a (£685.33 CTB + £6,950 HB + £2,501.20 CB) through HMRC’s own tax credits calculator – I get a tax credit entitlement of £3,101.16. Nothing like the £11,930.10 suggested here. How is that £11,930.10 figure calculated? What proportion is Working Tax Credits and what proportion is Child Tax Credits? Has the income threshold been taken into account (Once household income passes £16,105, the amount of Child Tax Credits the family is entitled to reduces). According to these figures, the household would breach the income threshold on earned income + HB, CTB and CB alone (£18,836.53) – and they would never be entitled to the full Child Tax Credit amount. So, how did Marina come up with her £11,930.10. If she’s not able to show her working, it’s going to be hard to believe that these figures haven’t been made up solely to push more Daily Mail’esque strivers vs skivers propaganda.

    • John Stepek

      Hi Bandages… as the piece states, the research in this piece was done using the entitledto.co.uk website. But it checks out if you use the HMRC tax credits calculator too. Housing Benefit and Council Tax Benefit do not impact on Child Tax Credit allowance (nor does Child Benefit). (As you go through the HMRC tax credit calculator, it states in the section on social security benefits: “Do not include any Working Tax Credit (WTC), Child Tax Credit (CTC), Attendance Allowance, Housing Benefit, state retirement pension,Council Tax Benefit, Income Support, income-based Jobseeker’s Allowance or income-related Employment and Support Allowance”). Inputting the figures into the HMRC website gives you around £4,760 in combined WTC and CTC between now and the end of the tax year (April 2016), which, when annualised, is roughly £11,800. Hope this helps.

      • farmideas

        Thanks for this John. What an outstanding smorgasbord of benefits, introduced by politicians desperate to buy a few votes. None are answerable in the long term but can swan off doing lectures and entertaining the Lords. I wonder if they were all ‘mods’ in their youth? Riding scooters so weighed down with lamps and mirrors they hardly moved. The interesting point came from engineersareunderestimated above who has become self employed, and very sensible he is to make the change. He is far from alone, and the consequence for the chancellor’s tax take must be considerable – yet it’s never mentioned. UK governments are so used to elephants being in the room they no longer notice them.

  • We’ve said it before and will say it again repeatedly until enough on the left get the drift that there’s isn’t an endless well of free money for catch-all socialism. Britain is living now off the proceeds of generations to come and it’s an utter disgrace.

    • Haiku Guy

      and so are we

    • James

      You should back up a sweeping statement like that with at least a smattering of data. Do you know that there is an alternative economic analysis, intellectually coherent and academically respectable? If you are interested in challenging your own world view, read for example Professor Wren-Lewis’s “mediamacro myths” series on his blog. Here is the first one http://mainlymacro.blogspot.co.uk/2015/04/uk-mediamacro-myths-introduction.html

      I’m not a trained economist, so I cannot say that you are definitely wrong, but your analysis posits a grim grey brutal future, whereas the Keynesian one does at least offer a hope of better things to come. So why not try it?

  • briancrockettbanbury

    At last the truth…..

  • Mrs_Roger_Rabbit

    Off topic I know but what’s the point of a chart that can’t be read because there is a stupid floating advert on the right hand side of my screen advertising “How To Prepare For a Bank Run” that gets in the way?

  • Oliver Thornton

    At last – someone else has run the numbers. Your reward for working harder and longer is a de facto tax rate of at best 77% and up to over 100%

  • Tom Bayley

    Can you explain why this is unfair? I am fairly frugal, living in a modest rented place, owning a 12 year old car, I don’t drink or go out, and I live on around the same amount as what is available in the table above. This is my choice of course (of lifestyle as well as work.)

    How much more should a junior professional have to live on, compared with a family of four on benefits where one of them is working?

    It would be good to increase the incentive to get out of the benefits trap. But there is already an incentive to work, or else working tax credit can’t be claimed. And anyway, to my mind, the emphasis on remuneration is not overly productive. I think humanity needs to appreciate being productive for its own sake, as part of a living community having values far beyond money. Instead, these days we live in relative isolation, and worry about money.

  • Rikaishi Rikashi

    The way this article is framed it seems to make a case for cutting the tax credits for the poorest. But this would only accelerate the widening gap between rich and poor that has made the UK one of the most unequal nations on earth.

    Would it not it be a better idea to tax the rich and increase tax credits to the junior doctors et al, thus ensuring that work is rewarded and halting or even reversing the growth in inequality so that the population as a whole are rewarded for their labor, instead of the proceeds being vacuumed up by the 1%.

    Humans do not stop working in times of plenty. Our basic instinct is to excel at what we do because being excellent is a very attractive trait. (it gets you laid) This has been shown by experiments with guaranteed incomes. While some people take time off work, it usually results in them improving their health and professional development and moving on to more skilled and productive work. This will be important to our economy as automation and AI continues to replace jobs of all skill levels, but especially low-skilled work.

    Productivity per capita has been growing at a steady clip since the beginnings of industrialization. The capacity of the welfare state to provide for people should be able to grow at the same pace, and if it is struggling to do so then you should be asking some hard questions about where all of the extra generated wealth is disappearing to.

  • John Mccarthy
  • Edward

    This is basically a way of slagging of those who might not have a high paid job i have a daughter and a partner i work 5 days a week 39 hours. Annual take home is only 12,000 with all benefits we have an income of 16,000 the reason we get those benefits is because on low pay you cant afford childcare living costs and basic neccesities so before comparing high end jobs where someone has been able to gain the qaulifications through going to university and getting loans (where not garuenteed a job at the end of it) try thinking about those who struggle to find work but when they do they work on lower wages hav family to support until their child/ren are able to attend state school so there partner can work aswell its not all about “skiving” as you say, its about the hours being available to that person and whether they could servive a month on only £500 pcm feding three mouths paying utility bills if you have a baby making sure they have all their neccesities womens toiletries (which arnt cheap!) And other unexpected bills. (Rant done)

    • karen

      Think also the £7 hour is important to mention. If workers were paid a decent hourly rate by the businesses they work for then the tax credit would be lower or unnecessary.