65% tax rate

65% tax rate

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I have been doing a small pro bono job for a client's daughter sorting out her housing benefit.I have discovered that when her working tax credit increases (or any other income) the local authority reduces her housing benefit by 65% of the increase. Is this fair????

Replies (14)

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By petersaxton
26th Jul 2013 11:09

Tax rate?

What has tax got to do with it?

If she's getting more money doesn't she need less help from the state?

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By Kirkers
26th Jul 2013 11:11

Yes it's fair.

She's still coming out with more money.

What would be unfair was if she was receiving full help from the state but having an increase in tax credits/wages etc.

She's still 35% better off.

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By johngroganjga
26th Jul 2013 11:19

Seems quite fair to me.  As

Seems quite fair to me.  As her income increase she does not need the rest of us to subsidise her housing costs to the same extent as previously.  One could debate the extent of the reduction that is fair both to claimants and to taxpayers generally.  The starting point would clearly be 100%.

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By arcon5
26th Jul 2013 12:04

What's unfair about the tax payer giving more money overall to somebody to subsidise their costs of living?

If you think it's unfair then its speaks volumes to people's attitude to the benefits system.

In many countries around the world if you don't earn enough money you don't eat - so we should think ourselves lucky we have a system in place (unless your SE in which case certain aspects of it exclude you meaning if an employed and self employe person suddenly find themselves unemployed, only one of them can claim JSA)

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By stephenkendrew
26th Jul 2013 12:24

Disincentive to work

What is unfair is the lack of incentive to work.

I did a similar calculation for one client and an employee.

The employee is a single parent, working part-time, claiming tax credits and housing benefit.

She is paid £7.50 per hour so if she were to work 3 more hours per week, she would earn £22.50 (gross) per week more.

She would then have deducted: -

20% for tax

12% for national insurance

She would also have her tax credits reduced by 41% of the gross

Finally her housing benefit falls by 65% of the net amount

Out of the gross pay of £22.50 she would actually only receive £2.12.

 

Would you go to work for 70p per hour?

 

 

 

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By petersaxton
26th Jul 2013 12:58

Using that argument

Why not have no tax credits and no housing benefit?

You appear to think she is capable of working so then she can work and earn like many other people have to. Is that incentive enough?

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By ShirleyM
26th Jul 2013 12:59

Would I go to work for 70p per hour?

Probably, because it would give me the satisfaction of knowing I am paying my own way (or as much as I am able), and also know that I am taking as little as possible out of the system.

Living off benefits is soul-destroying and takes away a persons self-respect. Why do some people insist on earning vast amounts otherwise they don't think it's worth getting out of bed and it's easier to let other pay their way for them?

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Stepurhan
By stepurhan
26th Jul 2013 14:08

Flawed calculation

@stephenkendrew. If she was earning £22.50 a week, on what basis would she be paying tax and national insurance? Unless I'm missing something her personal allowance would mean no tax and national insurance doesn't kick in until £149.00 per week.

Given these flaws, could you give some external reference for your calculations on tax credits and housing benefit. Since you haven't given us numbers on either, there is no way of following the second half of your calculation anyway.

Even accepting the numbers as is, she is not working for 70p per week. She is working for 70p a week MORE THAN SHE IS GETTING NOW. She is better off, and if she works more than 3 hours a week she will continue to be even better off (since the "cost" of reducing benefits will go away once she works enough)

I would also be interested in why you think it is fair for tax paid by people who do work to go in benefits to people who don't? How is the person receiving something for nothing being treated unfairly?

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By stephenkendrew
26th Jul 2013 14:56

flawed reading

@stepurhan

I think you need to read my post a bit more carefully.

She is already working. I did say she was working part-time and "if she were to work 3 more hours per week." So she is already earning (just) above the tax and NI thresholds.

The detailed calculation is as follows: -

Gross £22.50 less tax @ 20% and NI @ 12% leaves additional net pay of £15.30.

The withdrawal rate for tax credits is 41% - so her tax credits will reduce by £9.23, leaving her £6.07 better off.

Her housing benefit will reduce by 65% (see the original post) of £6.07 (i.e. £3.95) - which leaves her £2.12 better off for working 3 extra hours per week.

This might just cover her bus fare into work on Saturday morning, assuming she can get (free) child care whilst she's at work.

This is not a benefit scrounger. This is someone who is able to work, wants to work and is working. She is quite prepared to work more but, as I see it, there is little incentive for her to do so.

Perhaps I should rephrase my question - would you work an extra hour a week for an extra 70p? 

 

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By petersaxton
26th Jul 2013 15:14

I wouldn't work an extra hour a week for an extra 70p

but then I don't claim tax credits or benefits.

Maybe if they stopped her tax credits and housing benefit she might find it more of an incentive to work more?

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Stepurhan
By stepurhan
26th Jul 2013 15:21

Part clarification

I note that your post does say "more" hours, so I will accept I misread that for now.

You still haven't given any external source for the reduction in tax credits and housing benefit, so I still don't know where these percentages are coming from. I'm also a little confused by the figures you have provided. (which weren't in your original post so saying "see the original post" is inappropriate in this context). Are you saying that her total housing benefit is £6,07 a week? Is that right, because that seems a very small weekly amount to me.

Presumably at some level of hours she will lose all benefits. Does this mean that her "tax" rate will suddenly plummet?

Claiming I'm calling her a scrounger is evading my final question. How is receiving anything for not working (or working less hours) more unfair to the recipient than to the workers whose tax funds such payments?

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By stephenkendrew
26th Jul 2013 16:16

further clarification

Have a look at the final example here: -

http://www.hmrc.gov.uk/taxcredits/payments-entitlement/entitlement/income-examples.htm#3

You will see that tax credits decrease by 41% of income above £6,420.

By the original post I meant the question originally posted by Bernard where he's found that housing benefit reduces by 65% of net income.

Yes there is a level at which her tax rate would plummet - I reckon if she worked 84 hours per week (@ £7.50 per hour) she would receive no tax credits, so that her effective tax rate would reduce from 73% to 32%. The housing benefit would have finished well before then.

There will also be a level where she will actually be paying more in tax and NI than she will be receiving in tax credits.

I do not, for one minute, think that the existing system is fair. I think the benefits are too generous. There appears to me, however, to be little incentive for people to try and work their way out of benefits.

 

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Replying to OC:
By ShirleyM
26th Jul 2013 20:25

Make a few comparisons

stephenkendrew wrote:

There will also be a level where she will actually be paying more in tax and NI than she will be receiving in tax credits.

I do not, for one minute, think that the existing system is fair. I think the benefits are too generous. There appears to me, however, to be little incentive for people to try and work their way out of benefits.

That scenario applies to millions of low income households in the UK who do not receive benefits, and their tax goes to pay benefits for others who may actually end up better off than they are. A lot of people hold several low paid jobs, rather than claim benefits. It's called 'supporting yourself''. While I agree the benefit system is too generous, nobody is forced to take it, and many don't, as they prefer to support themselves no matter how hard it is.

It's a state of mind. Some people hate having to rely on handouts, and others are happy to take whatever they can get.

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Stepurhan
By stepurhan
26th Jul 2013 19:16

So what would be fair?

Whilst you have now explained where the 41% tax credit withdrawal comes from, I'm still not seeing a basis for the 65% reduction on Housing Benefit.

But regardless of where that comes from, what would be fair? Assuming you accept that benefits have to withdrawn at some point, what would you suggest? There will always be a time when withdrawal of benefits is going to lead to an apparently high marginal rate of "tax". A person 70p an hour better off, is still better off, even before you factor in the sense of self-worth from earning the money rather than just getting it handed over. If she genuinely doesn't want to be a scrounger, isn't getting money from honest work her goal anyway?

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