2 January, 2008
"We need immigrants to do the work that the British won't do"
1 This paper considers the financial incentives to work for those on low incomes. In
particular, it takes account of housing benefits and the impact of incapacity benefit. It
examines the net earnings of people living on benefits as compared to those working for the
minimum wage. It makes comparisons for single people, couples and families with children.
Summary
2 The effect of benefit levels combined with means testing of benefits for those who are
working means that there is little financial incentive for people with families living on benefits
to find employment. A family with two children is just £30 a week better off working than not
working.
A single person under 25 has more incentive to work but, on the minimum wage of £193
per week, is still only £50 a week better off than a non working person. If he is over 25 the
difference is only £43 per week.
A family with two children and one working member receives £79.50 of Working Tax
Credit, intended to cushion the impact of means testing of benefits and be an incentive to work.
However Working Tax Credit itself is means tested and is also treated as income for means
testing Housing Benefit and Council Tax Benefit. Overall this worker keeps only £6.77 of the
£79.50.
Even where someone with a family living in private rented accommodation secures work
above the minimum wage the means testing of benefits for working people means that the
worker keeps only between four and 10 pence in the pound of extra wages. For a family with
two children this remains true up to gross earnings of £507 a week. Families living in social
housing do considerably better – a family living in social housing with two children start
keeping more than 10 pence in the pound once they earn more than £200 a week. The higher
the gross earnings the greater the difference in take home pay between tenants in private
accommodation and those in social housing. For example, a worker on £400 per week gross
would have total household income, after paying his rent, of £298 if he lived in social housing
and £259 if he lived in the private rented sector.
All non working families with children and living on the maximum Long Term Incapacity
Benefit are better off than the equivalent working family on the minimum wage. Indeed,
they would be better off, assuming a family with two children, until the working family
was earning £430 per week.
There would be great benefit in getting our own population into work (paragraph 9).
The sources of the figures
3 The figures for families and single people over 25 whether living on Income Support or
working for the minimum wage have been based on the Department of Work and Pensions
document titled ‘Tax Benefit Model Tables April 2007’. (The DWP does not compile figures
for single people under 25).
The figures for families on Incapacity Benefit have also been based on the above
document, but substituting Incapacity Benefit rates in place of Income Support.
The Benefits covered
4 The following benefits have been taken into account:
Income Support
Paid to people who are unavailable for work.
Jobseekers Allowance
Paid to people who are available for work; the weekly amount is the same as Income
Support.
Incapacity Benefit
Paid to people who are incapacitated and have paid sufficient National Insurance
contributions to be entitled to Incapacity Benefit.
Those with insufficient National Insurance contributions are paid Income Support.
Housing Benefit
This relates to rents paid for private or social housing. People receiving Income
Support or Jobseekers Allowance receive Housing Benefit in full. It is means tested for
working people so the higher their income the lower their Housing Benefit.
Council Tax Benefit
People receiving Income Support and Jobseekers Allowance receive Council Tax
Benefit in full. It is means tested for people in work.
Child Benefit
Both non working and working people receive full Child Benefit.
Child Tax Credit
People receiving Income Support, Jobseekers Allowance or Incapacity Benefit receive
the full amount of Child Tax Credit. It is means tested for people in work.
Working Tax Credit
This is only given to working people and is means tested.
Free school meals
Payable only to non working families.
There are further benefits available to non working people, but not to working families,
and which have not been reflected in these comparisons.
DETAILED RESULTS
Jobseekers Allowance
5 Two families, one working, one not working and living in private rented
accommodation
5.1 Both families receive the same Child Tax Credit and Child Benefit.
The crucial difference, is that those in work have their Housing and Council Tax
Benefits means tested; those on benefits do not.
Thus the figures compare Jobseekers Allowance (or Income Support) plus full
Housing, Council Tax Benefit and free school meals for the non working family versus
the minimum wage plus means tested Housing Benefit, Council Tax Benefit and
Working Tax Credit, minus Income Tax and National Insurance for the working
family.
5.1.1 The figures show that, on the minimum wage a working family, living in private rented
housing and with one child, is £35 a week better off than the non working family. A
two child family is £30 better off and a three child family £25 better off.
5.1.2 The effect of earning more than the minimum wage
If a worker with two children earns £250, £325, or £400 a week (compared with
earning the minimum wage of £193 a week) the working family is then £33, £38 or £46
a week better off respectively, compared with a non working family.
5.1.3 The figures are based on the non working family receiving only the lowest benefits –
either in the form of Income Support or Jobseekers Allowance which are the same
amount. Receipt of additional benefits available to non working families but not to
working families will directly reduce the above figures.
5.2 Single people
5.2.1 Single people under 25 receive Housing Benefit for shared accommodation, comprising
one bedroom and shared kitchen and bathroom facilities.
Single people over 25 are entitled to self contained one bedroom accommodation.
5.2.2 A working single person under 25 renting shared accommodation is £50 a week better
off than a non working single person.
A working single person over 25 renting self contained accommodation is £43 a week
better off than the non working single person.
5.2.3 The effect of earning more than the minimum wage
If a single person over 25 earns £250, £325, or £400 a week (compared with earning
the minimum wage of £193 a week) he is then £52, £70, £117, a week better off
respectively, compared with a single person on benefits.
6 The effect of means testing on the take home pay of working people
6.1 Working Tax Credit
The primary reason the Chancellor introduced Working Tax Credit was as an incentive
to get people back to work. However Working Tax Credit is means tested and is also
treated as income for the means testing of Housing Benefit and Council Tax Credit.
A worker on the minimum wage with a family receives £79.50 a week Working Tax
Credit gross. But after means testing the worker is actually only £6.77 a week better
off.
A single person over 25 receives Working Tax Credit of £46.80 a week gross but after
means testing is only £4.37 a week better off.
6.2 Earning more than the minimum wage
For working people, their Working Tax Credit, Child Tax Credit, Housing and Council
Tax Benefits are all means tested. Once Income Tax and National Insurance paid by
working people is also taken into account, a working person with a family only keeps
between four and 10pence in the pound of gross earnings over the minimum wage.
For a family with two children this is the case until their earnings reach £507 a week,
which is £314 above the minimum wage of £193 for a 35 hour week. It is only above
earnings of £507 a week that a working person with two children starts to keep more
than 10 pence in the pound of extra earnings.
A single person over 25 does not receive as many means tested benefits as a worker
with a family and this means that they do not suffer as much from the withdrawal of
benefits as their income increases. They only have to reach earnings of £224 a week
before they start to get net earnings more than 10 pence in the pound of extra earnings.
7 Incapacity Benefit
7.1 A single person, couple or family on the lowest rate of Incapacity Benefit
The lowest level of payment for incapacity is the same as for Income Support (£59.15
for a single person and 92.80 a week for a couple with or without children). At this
level the comparisons between non working families receiving Incapacity Benefit and
working families are the same as the equivalent comparisons for Income Support.
7.2 A couple, with children, on the highest rate of Incapacity Benefit living in private
rented accommodation
7.2.1 Incapacity Benefit is taxable and means tested for Housing and Council Tax Benefit
purposes. However the Housing and Council Tax means testing only has an effect
when an Incapacity Benefit beneficiary on the maximum Incapacity Benefit rate also
works, which they are allowed to do to a limited degree (see footnote 1). The highest
Incapacity Benefit rate for a couple with children is £147.10 a week.
7.2.2 All working families with children and with one working member on the minimum
wage will be worse off than a family on the highest rate of Incapacity Benefit.
An average one child family with one working member would be £14 a week worse off
than a non working family receiving the maximum Incapacity Benefit.
A two child working family would also be £19 a week worse off and a three child
working family would be £24 worse off than an equivalent family on Incapacity
Benefit.
7.2.3 The effect of earning more than the minimum wage
If a worker with two children earns £250, £325, or £400 a week (compared with
earning the minimum wage of £193 a week) the working family is still £16, £11 or £3 a
week worse off respectively, compared with a family on the highest rate of Incapacity
Benefit.
7.3 A single person with no children, on the highest rate of Incapacity Benefit
7.3.1 The highest Incapacity Benefit rate for a single person over 25 living in self contained
accommodation is £98.45 a week.
7.3.2 At this maximum rate a single person on Incapacity Benefit will be just £3 a week
worse off than a single working person.
7.4 Comment
The maximum level of Incapacity Benefit has effectively been brought close to the
level of the minimum wage. There are good reasons of social equity for this but it does
mean there is very little financial incentive for such persons to return to paid
employment, especially as they are allowed some earnings (see footnote 1). This means
it is particularly important to ensure that claimants are genuine cases.
8 Social Housing
The above analyses relate to families living in private rented housing. This section
provides similar analysis for social housing tenants.
8.1 Comparisons of working versus living off benefits
Rents for private accommodation are much higher than for social housing but they are
fully covered by extra Housing Benefit for families with two or more children. For
these families the comparison between work and benefit is the same as that described
above.
However, single people and families with less than two children who are living in
social housing have a greater incentive to work because the “claw back” of Housing
Benefit for a working family finishes at a lower income level because their rent is
lower, as explained below.
8.2 The effect of earning more than the minimum wage
The Department of Work and Pensions estimate that social sector rents are much lower
than private sector rents. For example the weekly social housing rent for a two child
family is £62.95 a week compared with £173.30 for private rented accommodation.
For working people Housing Benefit is reduced by 65 pence for every extra pound of
net earnings, until the Housing Benefit paid gets down to Nil. Therefore for a social
housing tenant, once their clawback of Housing Benefit reaches £62.95 they then keep
the 65pence of their net earnings whereas the private tenant keeps losing 65 pence of
their earnings until their Housing Benefit clawback reaches £173.30. And once this
point is reached, the social tenant is paying £62.95 in rent and the private tenant is
paying £173.30.
Compared with a working family renting private accommodation, social housing
tenants potentially keep more of their gross earnings. As stated in section 6.2 above a
family with two children living in private rented accommodation starts to keep more
than 10 pence of every pound once their gross earnings reach £507 a week. For an
equivalent family in social housing the figure is £200, just £7 above the minimum
wage.
9 The benefit of getting the unemployed into work
9.1 The problem of a lack of financial incentives for work is a perverse effect of attempts
to lift families out of poverty rather than a direct result of immigration. However, it is
made more difficult to tackle by large scale immigration which, according to the Bank
of England, has reduced inflationary pressures by holding down the wages of the lower
paid. There would be very substantial benefits in policies which encouraged the
employment of indigenous workers:
- huge savings on the social security budget
- an increase in GDP per head (i.e. higher production without higher
population).
- less pressure on our infrastructure
- less downward pressure on low wages
- a reduction in the non working underclass.
Footnotes
1 Working whilst incapacitated
All recipients of Incapacity Benefit are allowed to earn up to £20 a week for an unlimited
period without their benefits being affected. They are allowed to work up to 16 hours / £86
a week for up to 52 weeks without affecting their benefits. In a limited number of
circumstances they can work up to 16 hours / £86 a week for an unlimited period.
Financial statements
Two sets of statements are provided, one set for family units in Private rented housing
(Statement numbers suffixed with a ‘P’) and a second set for family units living in Social
housing (statements suffixed with an ‘S’).
The statements provided are:
Statement 1 Summary comparing the total weekly household income for a working family
compared with an equivalent family living on Income Support or Incapacity Benefit.
Statement 2 A more detailed statement for the comparison of working versus Income
Support.
Statement 3 A more detailed statement for the comparison of working versus Incapacity
Benefit.
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