Work and Pay

Changes to Working Tax Credit: making work pay less

  • Published: Mar 08, 2012
  • Author: Anushree Parekh
  • Category: Work and Pay

Changes to entitlement to Working Tax Credit (WTC) for couple families with children will mean that some families are better off out of work than in work. It will also push families deeper into poverty.

Currently, couples with children can get WTC if one partner works at least 16 hours a week. From April 2012, couples with children must work at least 24 hours a week between them, with one working at least 16 hours to qualify for WTC .  

In theory, this gives couples an incentive to work more. In practice, the effect could well be the opposite. 
Consider an example. The Smiths are a couple with a six year old child. Mr. Smith works for 16 hours a week at £6.08 per hour (National Minimum Wage), Mrs. Smith is not in paid work. 

At the moment, this family would have a net income of £252 per week, comprising £97 from earnings, £20 Child Benefit, £60 Child Tax Credit and £74 WTC. (For simplicity’s sake, let us assume the Smiths have no housing costs). 

From April 2012, this family would lose the £74 WTC because of the new rule and the income would drop to £178 per week. If Mr.Smith could find eight extra hours of paid work his weekly income would be £292, an increase of £114: £66 by way of WTC and £48 from extra earnings. But in an already tight labour market where around 1.2 m people working part time are looking for full time jobs, (see MPSE UK 2011) the possibility of increasing one’s hours seems difficult. 

By contrast, if Mr. Smith stopped working, his net weekly income would be £190. This is more than his income at 16 hours a week, as the £108 paid as Job Seeker’s Allowance is £11 more than the £97 earned.  The consequences of the new rule imply that the Smiths are materially better off out of work. 

Comparing these income figures with the poverty threshold shows that the current situation of such single earner families working about 16 hours is dire anyway; and these changes to tax credits will worsen it. In the example above, even before the new rule is introduced, the Smiths are £76 below the poverty line  in 2011-12. From April 2012, this family’s net income is £148 below the threshold, or below the 40% of median threshold. So, low paid single earner couples now become some of the poorest of the poor.

According to the most recent tax credit statistics, there are over 215,000 families claiming tax credits that have only one earner working 16-24 hours. A lot of families stand to lose a lot of money. The changes run entirely counter to government rhetoric about making work pay, and are utterly at odds with the principles supposedly underpinning Universal Credit, whose introduction is still planned for 2013 in any case.

  1. There are a few exceptions, like those families where someone is incapacitated, an in-patient in hospital or disabled
  2. Before housing costs, adjusted for inflation

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