The Couple Penalty

[DocBennett]

The Conservatives have vowed to address the well documented fact that welfare recipient and low or moderate income families are better off financially if they live apart (even after accounting for the cost of running an extra home) . The two ideas mooted being a transferable tax allowance and eradicating any couple penalty in the tax credit system.

However, this is utterly fallacious and I am afraid I'm going to have to get a bit mathematical to explain!

The Tories' rhetoric about marriage is meaningless since they propose to abolish tax credits to households with income of over £50k. The approx. £20 per week you'd gain from transferable tax allowance is dwarfed by the tax credits and other payments the non-earner would receive if they separate.

I am soon to be a mother (with a mild disability) of 1 child under one, working three days a week. My beloved partner of 12 years and I have a happy 'Living Apart Together' relationship which suits us due to our professional lives - I rent in suburbia, he owns a flat in London. As we lead autonomous, unmarried lives, I would be entitled to around 12K in tax credits (including the child care, child and working and disability element) to top up my net income (after tax and pension contributions) of about £14,000 giving me a take home pay of £26,000. I would also get £1,200 housing benefit towards my HA rent.

If we move in together, under the current system, our joint income is just over the £60k threshold (and that doesn't make you well off in London by any stretch of the imagination) so we would get no tax credits and no Housing Benefit. My partner bought his flat years ago before the boom so the cost of running it is £6000 per annum all in. Subtract this from the lost tax credits to calculate the couple penalty which is £7,200.

Under the Tories as a single parent I still get the same tax credits but if we co-habit we are still entitled to nothing being well over the £50k threshold. I cannot transfer the tax allowance to the other half even if we did marry since I work part-time, so the couple penalty is still £7,200.

The 'couple penalty' is inevitable if you want to be proportionately more generous to people on lower incomes and if you assess entitlement according to household rather than individual circumstances. That is why I favour a move towards an individualised rather than 'household' tax credit system.

Before anyone takes the moral high-ground, we are discussing our options and are likely to forsake the £7k to move in together and provide a more standard family arrangement for our child.

I am simply illustrating the persistence of the couple penalty under the Tories. And surely by lowering the Tax credit threshold to £50k, a household is MORE likely to lose the credits if they live together than under the current £60k threshold?

If any tories reading this could give some clarity, this floating voater would certainly be appreciative!

All I can say is that with just me earning, compared with both of us earning the same amount jointly, I recently worked out that we lose over £200 a month under the current tax/TC system. That's almost all down to us losing out on DH's personal allowance. I pay nearly twice as much tax as we would jointly if we both worked for the same overall money.

Sounds like a couple penalty to me.

Actually my brain hurts with all this now. Is it in fact a couple benefit that we could - in theory at least - split our earnings between us and pay less tax? If I was single I wouldn't have that option...

Actually, IME the Government treats households and households or as individuals willy nilly as it suits. Usually to their detriment in either case.

Oh dear, I think I need my bed!

Essentialy there are three contributory factors to the 'couple penalty'.

1. Progressive taxation where a couple cannot maximise or share allowances means that (as you rightly point out Gaelicsheep) a single earner pays more tax than if the same were earned between two. Similarly, a couple on £14k and £40k pay more tax than a couple on £27 k each, even though the joint income is the same, because the higher earner is in the higher rate bracket.

1. Actually paying more to lone parents in the tax credit or other benefits system simply because they're lone parents.

1. Assesing entitlement to tax credits, benefits and other perks such as free school meals on 'household' income making it profitable to deliberately lower household income by removing the (usually male) main earner from the household that makes the claim.

The conservatives claimed they would address problem 1 by making the personal allowance transferable although this, they admit is unaffordable so would likely be for only married couples with very young children.

Problem two has already been addressed by Labour who equalised the 'Lone Parent' and 'Couples' element of the child tax credits.

Problem three is the biggest of them all and the tories are unwilling to say how they're going to eradicate this part of the couple penalty. In reality, they can't without severely reducing TC for everyone or means-testing based on the non-resident parent as well (though I can't see how they could increase maintenance payments than the CSA already demands) which would leave many single parents in serious financial hardship and back in the benefit trap where it no longer pays to work.

My suspicion is that the Conservatives will only address issue 1 with a very cosmetic and very small marriage tax break, rather than getting to the real root and so despite their rhetoric, the problem will persist.

OP what I think you have said is wrong. As far as living semi automonous lives goes is fine until you have children. Then he has to pay child support, this will be deducted from his salary and your benefits. And rightly so, why should the state support you when you have a beloved partner who can?

In response to your question, "Is it in fact a couple benefit that we could - in theory at least - split our earnings between us and pay less tax? If I was single I wouldn't have that option..."

I would suggest it is not an unfair benefit as every person has the same allowances. Joining forces with a partner to utilise them is, in some ways a 'benefit' but only in the same way that sharing the household chores is a couple benefit (something I don't think single poeple can legitimately complain about).

I am saying that your dp should be footing the bill for raising your child, rather than the state. You are saying that in addition to your £14K part time job you could get £13.2K from the state. As a single mum. You are not a single mum. You choose to live apart. This is state money. Surely there is a better way.

Child maintenance counts against income support claims but not tax credits.

I refer you to this government guide www.dsdni.gov.uk/index/csa/cmed-iss/iss-how-child-maintenance-affects-benefits.htm

paragra ph 1, bullet points 2-3

"Your child maintenance payments will not affect a claim for Housing Benefit"

"Your tax credit awards won?t be affected by your child maintenance"

actually as from this month maintenance will be disregarded from IS as well..........

GOODASGOLD,

I did point out in my original post that my calculations were mainly illustrative to show the persistence of the couple penalty and that we would probably "forsake the £7k to move in together and provide a more standard family arrangement for our child".

The moral argument at any rate goes slightly deeper than 'maximising your tax credit entitlement is always wrong'.

DOCBENNETT,

What is troubling you then? If you want to live together to provide a more standard family arrangement for your child, and the state benefits for not doing so might be changed... It's all hypothetical isn't it?

Pretending not to be together when you are together is wrong and more importantly, not good enough for your child (you have already said that this is not what you are planning). Just to get more tax credits?

Then there must be something wrong with the system. No maintenance on IS makes me think that this is the case.

I completely agree that 'Pretending not to be together when you are together is wrong' but we wouldn't be pretending anything if we decided not to cohabit. Whether a 'couple' are assessed as such depends on financial autonomy but primarily living arrangements.

What is troubling me is that we as a middle income couple (below London average wage in my case) are heavily taxed all our lives and get no help when our income drops because we have a child. If we chose to stay apart then we would be receive tax credits which would leave us 'comfortable' though hardly 'rolling' but together we get nothing.

There is and it should be changed. Even if I don't stay apart just to get the extra money many more (especially those less well paid than us) couples will. The higher moral path that the likes of you and I choose may be all very well but noone thanks you for it or cares that you can't afford even a domestic holiday.

I guess I get my knickers in a twist because the conservatives are making a disingenuous election pledge. I totally agree with you that "Then there must be something wrong with the system" but my gripe is that no-one has the political will to change it.

Well, if he is your 'beloved partner' how can he be leading an autonomous life as you claim? He is either your partner, and therefore by definition not completely autonomous or not your partner in which case he may be autonomous.

I think you are dishonest frankly if you are claiming when you are not entitled. That to me is the problem with tax credits, they encourage people to commit fraud, which is effectively what you are proposing to do. The UK loses an enormous amount of money in benefit fraud each year which could be used to pay down the debt of the UK.

What you can do as a married couple is to ensure that any savings are put into the name of the person who pays no tax, or the lowest rate of tax and save some money that way.

Setting up a system which encourages parents to live apart and be dishonest is symptomatic to me of Labour's desire to break down the family and let in the Nanny State; and also of their desire to create a client state who can be cowed and terrified into not voting for things to change.

What you are doing is effectively stealing from all of us who pay our taxes, and also taking from those who do genuinely need help. You seem very pleased with yourself; I hope you are, and I hope that it comes back and bites you in the bum one day.

Firstly, I am not 'planning' to do this. I am pointing out that there exists an injustice because I completely agree with you that "Setting up a system which encourages parents to live apart" is wrong.

However, people that do choose this are neither being dishonest nor committing fraud. If you read
www.hmrc.gov.uk/TAXCREDITS/start/claiming/get-started/joint-single-claim.htm

"What qualifies as a couple for a tax credits claim?You and your partner need to make a joint claim if you're:

married
in a civil partnership
living together like you're married or in a civil partnership

None of these have ever applied to us. The definition of couple has to be based on pratical things like living arrangements and not emotional involvement. Committed relationship and living apart is a growing phenomenon and the idea that one has to live together is being proved incorrect by the 2 million 'Living Apart Together' couples in the UK. In places like Sweden this is a rapidly growing percentage of the population and will continue to be part of the social landscape.

An individualised tax credit system would remove the couple penalty and then we'd all be happy.

Regardless of the maths I am frankly bemused by the fact you think it is ok to claim £12k worth of tax credits when the father of your child ought to be paying to support that child.

• also, when I say we're autonomous I mean on a practical level: we pay our domestic bills separately on separate homes, we do our washing and domestic tasks separately, no joint bank accounts, separate cars etc.

He spends approximately 3 nights a week visiting me and I visit him 1 night a week and we have three evenings apart which is absolutely essential as I need complete silence and no disturbances while I write up my thesis.

Intimate relationships are about emotional and personal support not necessarily cohabitation.

scaryteacher - agreed. Completely militates against stable family life, encourages state dependency. The story of the last 13 years.

Besides, transferable tax allowances used to be a feature of the tax system so bringing it back would not be that radical. The other fiddle of people having their own business and 'putting the wife/husband on the payroll' is also well documented and happens for the same reason.

In my view, I think we should give every adult a £10k tax allowance and a £5k tax allowance for each child all freely transferable within the family. That way, if one parent ina couple gives up work when a child is born and the other adult carries on working the extra cost of having a child is compensated by the extra tax allowance for the working parent. It would reduce the benefits trap and also make it easier for parents (mainly women) to go back to work if they have to pay for childcare.

BetaDad - so how would that help single parents who want to go back to work

nancydrewrocks...
We haven't made any arrangements yet but as I keep repeating, we will probably NOT claim this (I was being purely academic) and decide to move in together for the sake of convention. This may take a little time as he will need to sell his place and I will need to find somewhere bigger.

However, if (only IF) we did remain apart, my partner would be paying to support our child ... the tax credits would be on top of that.

We're ordinary middle-income professional people and will always support our child the best we can. Even if we lived apart, the OH would drop in after work to help with stories and bath-time before jumping on his motorbike and heading home. But with the cost of living so high one has to be pragmatic as well as idealistic.

BetaDad -

I agree that a £10k tax allowance and a £5k tax allowance for each child all freely transferable within the family. For us, it would reduce the couple penalty by about 2k down to £5k which would make it less significant. Scrap the Working and Child tax credits and it removes the couple penalty completely. But keep child-care tax credits for low income people, so that low income people like ToccataandFudge will always be able to get back into work.

I wouldn't be able to get back into work with only child-care tax credits.

I guess this is always the dilemma. Helping those on their own makes a couple penalty inevitable. The only way of fixing it is to give almost as much tax credits to a lower paid person in a couple situation as you would to a singleton... and this would be completely unaffordable (I mean, they can't even afford the transferable allowance).

ToccataAndFudge - it would help you by giving you £15k of tax free earnings (i.e £10k for you and £5k for your child). You could earn £15k tax free as opposed to the current £6475 personal income tax allowance.

Would that not help you if you could work tax free at least part time up £15k?

True, but a single mother on benefits gets about 12k on average (including housing benefit, council tax benefit etc) and she would lose most of these by going to work.

So taking a full time job for £15K pa would leave her with £17K (she'd still get child benefit and possibly some small amount of HB). This would mean she is (in real terms) taking home an extra £5k per year and for a 35 hour week that works out at an extra £2.90 for every hour worked which to a lot of people would hardly seem worth the effort.

So Mr Bloggs and Mrs 2 doors down with 1 child could have one parent earning 25k tax free

But Ms Smith with her one child on her own could only earn 15k before being taxed.

That's an awfully generous pay you've given tehre for a 35hr week..........£8+!

Now a minimum wage 35hr week you'd be looking at £10k a year.

Fine it's tax free

You'll get up to 80% of your childcare costs paid - so you've still got to pay some of it, plus round here the limit for earnings for housing benefits is relatively low compared to some areas - so you'd really get rather little in terms of that.

So £800 a month (plus a little housing benefit and council tax benefit and child benefit - lets be generous and say £200 for that)

£1000 to pay a £400-500 rent, the rest of your council tax and bills, 20% of your childcare costs and everything else.

And with Doc's example - she wouldn't get getting an extra 5k a year, as some of that money woud have to go on the topping up childcare costs.

Ah yes, I forgot you would have to meet 20% of the childcare costs. So based on a 35 hour week with 4 weeks holiday with childcare at £150 pw ..

That means you actually get an extra £2.12 for every hour worked.