« ?? | Main | Book News!! »

November 16, 2005

Taxes, Credits and Benefits.

What a wonderful system El Gordo has built for us.

A single parent earning £37,500 with a family of two claiming the maximum childcare element of the working tax credit currently pays £6,959 a year in income tax; £3,113 in National Insurance and gains £6,776 in working and child tax credits.

If they receive a wage rise of £2,500, they pay income tax of £7,959, £3,138 in National Insurance and receive £5,851 in tax credits. Therefore, they only keep £550 of their £2,500 pay rise.

A 78% marginal tax rate. A real incentive, eh?

November 16, 2005 in Your Tax Money at Work | Permalink


TrackBack URL for this entry:

Listed below are links to weblogs that reference Taxes, Credits and Benefits.:


I have no idea of the details, but I imagine that couple's increase in earnings takes them over the threshhold for receiving some benefits.

I imagine this is inevitable, if one has a system of means tested benefits.

One possible solution is to introduce a lag into the system
to restore the incentive. If the couple were allowed to keep their old entitlement for a year (say), rather than forgo it immediately, they would have an incentive to earn more money. Twelve months on, one would hope that they were looking for the next pay rise.

James C

Posted by: james C | Nov 16, 2005 9:21:40 AM

It's important also to note how many people this actually is. A single parent earning £37,500 a year with two children is surely not that typical.

Posted by: Matthew | Nov 16, 2005 10:48:27 AM

It's not important!

It points to a fundemental systematic weakness in the system.

Another point is why is the state encouraging single parenthood with tax breaks?

Posted by: Rob Read | Nov 16, 2005 1:02:32 PM

The less I earn, the better off I am. The British government take more tax credits off you than your increased income.

Posted by: wonkotsane | Nov 16, 2005 3:08:17 PM

Would a single parent with a family of two be able to claim "the maximum childcare element of the working tax credit" ? That's a hell of a lot of dosh, £6776 p.a. Still, if you had your way, it'd drop, right?

Posted by: dave heasman | Nov 16, 2005 3:17:22 PM

I believe it's also true, that someone earning the legal minimum wage starts to pay income tax after working fourteen hours in a week.

Bring back Nigel "low, simple, compulsory" Lawson, I say.

Posted by: Andrew Duffin | Nov 16, 2005 3:21:18 PM

It's not Rob. The issue arises because the higher rate level doesn't match up with the thresholds for the other benefits. That's not a systemic weakness.

Posted by: Matthew | Nov 16, 2005 3:44:43 PM

Why not just give everyone a tax-break (i.e. a high zero-extortion band say 15000 per adult)?

It would be a far better incentive to work, cost far less to administrate and not incentivise single motherhood/penalise marriage.

Tim adds: Set it high enough (mean income? media?) and it would be more progressive than the current one too.

Posted by: Rob Read | Nov 16, 2005 3:51:16 PM

So they set it up so richer parents don't get as much state assistance.

Its not about incentives is it? its about having a safety net. So the earnings increased by 2,500 - looks like this is taking them out of the safety net.

Benefits like this are used to guarantee a minimum income to make it worthwhile for a single parent to work. They are meant to incentivise the decision to work - that is what they are designed for. They aren't designed to reward salary advancement.

The argument is more on the inadequacies and lack of clarity about how the tax an benefits system works. There may be a case that the safety net is too low. I don't have a view on this as yet.

Posted by: the-man-in-black | Nov 16, 2005 4:45:54 PM

It's not a safety net! It's more like mountaneering, where you are roped to someone, except in this case you have to drag them up the slope if they decide to take it easy.

Government is a transfer agency. The government can only help one by harming another. The welfare state rewards irresponsibility and funds it by punishing financial success. It therefore ensures it gets more irresponsible citizens and economic destruction.

A safety net works by slowing the descent. You still fall and have to climb back on the wire. A system based on LOANS not on extortion would match a safety net analogy.

I personally feel that the money the state extorts from me is expressly used to harm people like myself.

Posted by: Rob Read | Nov 16, 2005 6:55:41 PM

A personal allowance of £15,000 and no benefits would mean a huge cut in income for millions of people.

Posted by: Matthew | Nov 16, 2005 9:27:05 PM