The missing part of Osborne’s Tax Credit puzzle: Higher pay, more work

Faced with a backlash on proposed cuts to Tax Credits, the Chancellor is being pressed to tweak, rethink and amend his approach to mitigate the impacts on low-income families.

This would be a mistake.

The Tax Credit system is fiendishly complex, hugely expensive and does little to address the underlying problems leading to low family earnings. The last thing that is needed is further meddling around the fringes, added complexity and greater uncertainty for the families involved.

Instead, the real problem must be tackled head on. The vast majority of families would rather put money in their own pockets, rather than rely on state support. The government must commit to helping families ensure this is the case by increasing their earnings and, where possible, boosting their working hours.

The potential impacts should not be underestimated. New research from the Social Market Foundation shows that, for some households, a few additional hours or slightly higher pay could completely mitigate the impact of tax credit cuts. For instance, the research shows that a couple with one earner working full-time on the minimum wage would need the second earner to work at the new National Living Wage for an average of six and a half hours per week, in order to see their increased earnings offset the cuts.

The same couple with both workers already in full-time minimum wage work would need to see their wages rise to £8.05 per hour (just 85p higher than the new National Living Wage) to offset the cuts.

The exact changes to hours and pay vary for different households and would need to be considerably higher for those also claiming Housing Benefit. Some families may still need transitional protection. However, what this analysis shows is that if families could get the right support to do it, higher pay and more hours work are the answer to the Chancellor’s Tax Credits puzzle.

The problem is that, in an increasingly insecure labour market, many families will struggle to find extra work or increase their earnings on their own. This means that simply increasing the National Living Wage or cutting taxes is not the answer. Families need effective support to upskill, progress up the earnings ladder and find the higher paying jobs they need.

The government now has an immediate opportunity to put this support in place. The upcoming Spending Review must announce fundamental reforms to ensure that Jobcentre Plus, the government’s flagship Work Programme scheme and spending on adult skills is completely focussed on helping families increase their earnings.


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