George Osborne is out to prove just how much he despises the lowest paid with his new rate of marginal tax for people transitioning from benefits to work that ranges from 75% to 100%. Why haven’t you heard about the new tax bands? Well, it’s because tax in this country is ridiculously complicated, with income tax only making up about half of the deductions from your pay packet. There’s also national insurance, reductions in child benefit from 50k, loss of personal allowance from 100k, and more, meaning that the effective tax rate is much higher. This is known as the marginal tax rate, and it tells if your pay went up by £1, how much of it would you end up with in your pocket. The Telegraph recently calculated that we have 12 marginal tax bands;
Currently the highest tax rate is for people earning between £50k and £60k who also have 4 children – they pay 70% tax. That’s high compared to the 47% rate that the highest earners pay, but it’s not as much as the minimum 75% marginal tax rate that George Osborne wants to tax people who are on minimum wage.
So what is being proposed? If you are not employed, you get benefits from the state – income support, housing benefit. If you are employed and paid well, you do not get any benefits. Rather than there being an instant jump between the two where if you earn just £1 you lose all benefits, benefits are withdrawn in line with how much you earn. If for every pound you earned, you lost a pound in benefits, your marginal rate of tax would be 100% – i.e. you are not any better off for having earned that money. That tends to disincentive people from working, so we have a system known as welfare-to-work where people only lose a fraction of their benefits – for example losing 50p in benefits and income tax for every £1 you earn would put you on a 50% marginal tax rate. That’s still pretty high, but it’s not high enough for George Osborne. He wants to start the benefits cuts at 75p for every £1 earned, taking it higher if you receive more benefits. The Telegraph give an example of someone who works 35 hours a week on minimum wage. For every £1 extra that they earn, the government will take 20p income tax and 12p national insurance, and will take 48p in tax credit reductions, and 13p in housing benefit reductions. That leaves the person with 7p in their pocket for every £1 they earn. By contrast, every pound extra that George Osborne earns will net him 58p – nearly ten times as much as someone on minimum wage. Mwhahaha.