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An effective tax rate of 89.5%!?

An effective tax rate of 89.5%!?

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I've got a part-time member of staff who's a single parent with one child. I want to give her more hours and money and she wants to work more hours and get more money.

I've been trying to work out how the increase will affect her housing benefit. This is not straight forward - the housing benefit statements make the tax credit award notices look easy. It appears that any housing benefit is reduced by 65% of any increase in income. Does anyone know whether this is correct please?

If this is correct then the position is: -

I give her an extra salary of £1,000;
She pays tax and NI on this salary (at 20% + 11%) of £310;
Her tax credits are reduced (39% of 1,000) by £390;
Her housing benefit reduces because of her extra salary (65% of 1,000 less 310) by £448.50;
Her housing benefit will increase fllowing the tax credit reduction (65% of 390) by £253.50.

So, altogether, out of the £1,000 (which does of course cost me £1,128 with NI) she will actually receive £105.00 (1,000 less 310 less 390 less 448.50 add 253.50). If I'm right, she works extra hours, it costs me £1,128, of which the government gets £1,023 and she gets £105 (about 70p an hour).

My employee says she may as well stop at home and watch Jeremy Kyle (I'm afraid I've no idea who he is!) Now where's that journalist chap?


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By WhichTyler
23rd Jun 2010 23:12

And it's just got worse...

There are a surprising number of people for whom work (is financially at least) not very rewarding, so not really a 'carrot'.

The 'stick' incentive will come when benefits (particularly housing benefit) are removed after a period of unemployment.


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