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Tax credits reduce incentive to work more?

(127 Posts)
11stone4 Thu 07-Feb-13 17:11:51

My best friend Has found this to be the case. The more hours she works the less tax credits she gets. So what's the point exactly to work longer hours to get working and child tax credits to be reduced. I'm a SAHM FWIW

Dollyboo Thu 07-Feb-13 22:58:33

More than potatoe,, nicely said!

LineRunner Thu 07-Feb-13 22:58:42

If people judge me they can fuck off unless they have been in my shoes, with a husband walking out with no notice leaving you with two small children to raise.

JoanByers Thu 07-Feb-13 23:07:40

These threads are bonkers, so much mud slinging, so little content,

The tax credit system works like this:

Providing you work 16 hours per week, you get £3870 as a single parent or couple.

In addition, you get £545 for having children, plus £2690 per child.

If you or your child(ren) is disabled, there is extra money.

Everyone is entitled to this, but it gets withdrawn.

Tax credits get withdrawn when you earn over £6420 per year, at a rate of 41%.

You pay income tax when you earn over £8105 per year, and national insurance when you earn over £146 per week (£7592 per year).

Income tax is 20% and national insurance is 12%.

The national minimum wage is £6.19/hour, and therefore someone working 16 hours per week would earn £5150.08 in wages.

On top of that they would get £3870 in working tax credit, so effectively you take home not £6.19/hr, but £10.84/hr.

On £5150.08 you pay no income tax and no NI, and no tax credits are taken off you.

If you earn over £6420, as mentioned, they start to take the tax credits away, at 31%

On NMW this would be over 20 hours per week.

So on NMW, effective rates of pay with 1+ children:

Hours 0-16: £10.84 per hour
Hours 16-20: £6.19 per hour
Hours 20-23.5 £4.27 per hour

Then you start paying income tax, which is 20% as mentioned, so, effective tax rate is 51%:

Hours 23.5-25.5: £3.03 per hour

Then NI kicks in, so you are up to 63% 'tax':

Hours 25.5-30: £2.29 per hour

At 30 hours per week, they chuck another £790 of working tax credit at you.

So you've then got a choice:

16 hours per week NMW = £9,020.08 net (£10.84/hour, effective net)
30 hours per week NMW = £12,387.43 net (£4.63/hour effective marginal hourly rate above 16 hours per week)

Beyond 30 hours you lose more tax credits and there are no further bonuses, so the picture gets worse.

Also you get Housing Benefit, Council Tax Benefit, free school meals, and many other things that can make it irrational to work more hours.

It is of course hideously complicated, and a major deterrent to working more hours, because the net impact on your circumstances can be negative - you wouldn't more hours if it was going to make you no better off. Of course this tends to trap people in jobs with no prospects, but that's always going to be an issue when you pay any kind of means-tested benefits.

As I understand it the alternative is a citizens income scheme where each person is paid £x,000 per year, regardless of income. I believe this is a Green Party policy. If you work, you do not lose any of this, so there is no benefits trap as such.

JoanByers Thu 07-Feb-13 23:10:15

"My aim is to get off tax credits - I HATE being reliant on the state. I have always taken on more hours whenever I could, and the rule of thumb is for every £3 extra you earn, you loose £1 of your tax credits. "

I don't think so, you lose 41%, plus there is 32% income tax and NI, so effectively for every £4 you earn, you lose £3 (well, £2.92) in tax credits.

JoanByers Thu 07-Feb-13 23:10:32

tax and tax credits that should read.

LouMae Thu 07-Feb-13 23:10:40

They should be scrapped. They were brought out with good intentions but have morphed into something else completely.

morethanpotatoprints Thu 07-Feb-13 23:11:46

LineRunner

I know that you weren't suggesting anything of the sort. However, I would like to add that even though I claim tax credits I would not complain if they were taken away for those who are worse off than my family.

I believe that single parents should be supported, helped and not treated like second class citizens. I am lucky to have a dh to support us the best he can and if he couldn't work for some reason then I could. Single parents often don't have this choice. I also chose to be a sahm, again single parents don't always have this choice.

So to all the people who are likely to lose out with the benefit cuts including sp, disabled, carers, pt workers, low income workers, sorry if I've missed any groups. I won't be moaning about my lot, we'll manage.

janey68 Thu 07-Feb-13 23:14:39

Some people are being unnecessarily defensive on here. No one is saying people deserve to be left in the shit when their partner runs off and dumps them .

If people bothered to read the op properly, she is pointing out that a system which discourages people from working more hours, or taking on tougher jobs, because they can end no better off, is clearly a screwed system

I want people with disabilities and who cannot work to have a welfare system which supports them. I also want a fair society where people who work 37 hours earn proportionately more than someone doing the same job for 24. Not theoretically more, with a higher income on paper which then gets slashed with loss of other benefits, but more in reality. Otherwise, where is the incentive?

The problem with MN is that some people don't understand that it's possible to not vote Tory, and to want a genuine welfare system but also to want a fair system which rewards people who try to be financially independent and improve their position through working more hours or taking on tougher jobs. These views really aren't mutually exclusive you know!

I said on a similar thread the other day- a good idea would be a 'citizens wage' - a sum paid to everyone which enables basic needs to be met, with employment providing more money on top- not as an alternative but as an addition

LouMae Thu 07-Feb-13 23:19:33

And why do single parents need a pity party? Husband walked out? Are you not a. Capable able bodied adult? I've raised ds alone since birth in hard circumstances, he is my responsibility. I have my health and my brain, I don't need pity or patronizing, I have my independence.

LineRunner Thu 07-Feb-13 23:22:48

I think theory is fine until it collides with the actual lived lives of women.

LineRunner Thu 07-Feb-13 23:23:38

LouMae nice try.

Lovelygoldboots Thu 07-Feb-13 23:24:46

The reason for defensivness is when a discussion about benefits commences about a "friend" who does not work extra hours rather than a wider discussion about government policy. Then I would take that post more seriously. The op was holding her friend up for judgement, maybe unintentionally by using her as an example about a wider discussion. I didn't think that was fair.

LouMae Thu 07-Feb-13 23:26:29

What do you mean nice try? It's an honest answer.

LineRunner Thu 07-Feb-13 23:26:44

Also I have said many times on threads that fathers should pay to raise their own children, not rely on the tax credit system to do it for them.

That is a political point that responds to the OP.

JoanByers Thu 07-Feb-13 23:27:10

The actual lived lives of women are rather complicated. The number of single parent families has increased massively over the last decades. The causes of this and the net overall impact of the benefits system cannot really be determined by resort to anecdote.

LineRunner Thu 07-Feb-13 23:28:35

How is policy arrived at?

Lovelygoldboots Thu 07-Feb-13 23:32:17

Government quangos working on behalf of ministers I think. They crunch out the facts to make it fit to the party manifesto. And the Torys want you basically to not be reliant on the state at all. Nice theory but not always human.

LineRunner Thu 07-Feb-13 23:33:14

I think it has been referred to as 'anecdata'.

morethanpotatoprints Thu 07-Feb-13 23:35:54

LouMae.

The empathy for sps came from me because I know how difficult it can be and as a family how your choices are narrowed. For example married couples can have a sahp, although some get negative comments. Its not so easy to make the choice if a sp. Society judges so easily and I was merely stating there are people worse off than ourselves.
I don't think sps in general ask for sympathy, but I like to empathise with people in life and acknowledge that "There but for the grace of God go I".

LineRunner Thu 07-Feb-13 23:40:54

fathers should pay to raise their own children, not rely on the tax credit system to do it for them

I would still prefer this. ^^

Lovelygoldboots Thu 07-Feb-13 23:48:28

Anecdata grin

LineRunner Thu 07-Feb-13 23:52:07

Lovelygoldboots, credit for that to LRDthefeministdragon (unless she took it from somebody else) smile

Lovelygoldboots Fri 08-Feb-13 00:02:23

I'm going to use it myself Linerunner smile

catladycourtney1 Fri 08-Feb-13 00:26:39

I think, basically, that tax credits should be an incentive for people to work - surely that was their intended purpose in the first place? So that people are always better off in work, even part-time work, than on JSA and claiming housing benefits and everything else that goes with it. Obviously in an ideal world, nobody would claim anything from the state, but I would sooner my tax money be paid to honest people who are in work, or to allow a mother (or father) to work fewer hours while the children are young if the other parent is working full-time, than to people who are chronically on the dole.

I think that taking tax credits away from people in part-time work or on a low wage is a bad idea, because it is very possible to be better off not working than working part-time or for a low wage, and obviously, especially if they have a family to support, lots of people are going to choose the option that allows them to put food on the table. Of course, they should reduce the more you earn, but you should always be better off working than not.

LineRunner Fri 08-Feb-13 00:29:03

Ideally, I think that wages should be an incentive to work. As other posters have said, we have empoyers making profits whilst the wages they pay are topped up by taxpayers.

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