Government changes will reduce incomes greatly

The package of changes to tax, tax credits and benefits will reduce household incomes significantly, particularly for lower earners, the Institute of Fiscal Policy (IFS) has said.

In new analysis the IFS analyses the extent to which the new National living wage will compensate for the losses caused by tax and benefit reforms for different types of households.

The Institute’s Director Paul Johnson said George Osborne’s higher minimum wage would come “nowhere near” to compensating for the Chancellor’s planned cuts to tax credits.

Among households with someone in paid work, those eligible for benefits and tax credits are estimated to lose an average of £750 per year from the changes to tax and benefits. On the other hand, the average gain from the National Living Wage (NLW) for this group of 8.4 million working age households is estimated to be £200 per year. This suggests that the new NLW will on average compensate for 26% of the losses this group of working households will see from changes to taxes, tax credits and benefits. They will remain £500 worse off on average.

Mr Johnson said that amongst the cuts, which will also affect people with children, the most significant was for people who went to work. He said: “Actually the biggest cut will be for those in work and in particular the amount you earn before you start losing tax credits has been pulled back a great deal.”

Households were no one is working are estimated to be hit especially hard by the tax and benefit changes will not gain from the new NLW.

The analysis also found that the households gaining from the NLW are often not the households losing the most from tax and benefit reforms announced. It is households in the lower half of the income distribution who stand to lose the most from reforms to taxes and benefits. The households gaining from the NLW are more evenly distributed across income distribution, with the largest gains in the middle.

William Elming, a research economist at the IFS and co-author of the briefing note said: “The new National Living Wage will offer only partial compensation to working age households who will see their incomes fall as a result of tax and benefit changes announced for the current parliament. There may be strong arguments for introducing the New NLW, such as increasing earnings and the incentives to work for the low paid. However, the new NLW cannot be considered a direct substitute for benefits and tax credits aimed at lower income households. The wage increases are not as large as the benefit cuts. And, it is not targeted at the same group who lose from the cuts.”

The National Living wage was announced in the July 2015 Budget for those aged 25 and over and will replace the national minimum wage.

The cuts to tax credits and other benefits are part of a drive by the government to make £12bn welfare cuts.