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.