Thousands of low-income households will be worse off next April when the increase in the minimum wage is more than wiped out by changes to tax credits, according to a new report from UNISON published today (Wednesday).
The analysis shows that many families face an income loss next spring, when what they were expecting was the pay rise that the Chancellor promised them in the July Budget. The report also shows that low-income households are set to be worse off every year until 2019*. Only in 2020 is their income higher than it is today.
The report – How a pay rise becomes an income cut – shows that although families will gain from increases in the minimum wage (to £7.20) and in the personal tax allowance next April, changes to the tax credits threshold and taper mean they will be many hundreds of pounds worse off.
The analysis shows that a family with two children with both adults (over 25) working 35 hours a week on the national minimum (NMW) wage is set to lose £854 a year. This household would have been £1,549 a year better off had there been no changes to tax credits next April.
Those under 25 will be hit harder as they won’t benefit from the increase in the minimum wage to £7.20 an hour. A family with one child with one earner under the age of 25 on the NMW working 35 hours a week is set to lose £1,427 a year, while the same family with one earner over 25 will be £808 a year worse off.
A lone parent (over 25) with two children, working 16 hours a week on the NMW is set to lose £165 a year. They would have been £580 a year better off without next April’s changes to tax credit.
The analysis also reveals that – on the basis of known government policy – a family with one earner (over 25) earning the minimum wage, working 35 hours a week with one child is set to be worse off every year for the next four years. Their income will be less than it is now until 2019. In 2020 they will be just £291.36 a year better off than they are today. Over the lifetime of this parliament, instead of being £6,473 better off, they will lose £2,032.
UNISON General Secretary Dave Prentis said: “The lowest paid have been led to believe they’ll be better off next April when the minimum wage goes up and they get a pay rise. But as the government gives with one hand, it snatches away with the other.
“At first glance low-paid workers might look quids in, but on closer inspection the Chancellor is really rewarding them with an income cut. Many workers on the minimum wage will lose out as a result of the plans. It is dishonest for ministers to claim that people will be better off. They won’t.
“Any gain to families from the enhanced minimum wage and a higher personal tax allowance is going straight back to the Treasury through the changes to tax credits.
“The Chancellor’s pay con-trick will create chaos to household finances and plunge more families into poverty.”
The changes to the tax credits threshold and taper will be laid before parliament sometime between September and January. UNISON is calling on MPs to oppose them.
How a pay rise becomes an income cut is part of a new UNISON campaign aimed at exposing the impact of the changes to tax credits on families.
Notes to editors:
The report is available here.
* Assuming that the personal tax allowance reaches £12,500 in April 2019, and that the 50p an hour increase in the enhanced minimum wage is repeated in April 2017 taking it to £7.70 an hour and that it reaches £9 an hour by 2020, with the changes to the tax credits thresholds and taper then households will continue to lose out every year.
From April 2016, the threshold for tax credits will be cut from £6,420 to £3,850. Also the rate at which tax credits are reduced is being increased. This means that instead of losing 41p for every £1 above the threshold, people will lose 48p.
Currently at £6.50 an hour, the national minimum wage is set to rise to £6.70 an hour in October, and to £7.20 an hour from April 2016 for the over 25s. A minimum wage worker doing 35 hours a week will see their pay increase from £11,830 a year today to £13,104 a year next April.
The personal tax allowance is set to rise from £10,600 to £11,000 next April. As a result basic rate taxpayers will pay £80 a year less in income tax. In April 2017 it will rise again to £11,200. As a result basic rate taxpayers will pay another £40 a year less in income tax.