How the Tories will make working pay as those on benefits can keep more of what they earn [U.K.]

dailymail.co.uk – news – Ministers to end scandal of benefits claimants rewarded for staying out of work
July 16, 2010.   By James Chapman

The biggest shake-up of Britain’s welfare system for decades will end the scandal of millions of people being paid to stay out of work.

Ministers are preparing to offer a radical ‘make work pay’ guarantee that will ensure that around 40p in every extra £1 that claimants earn stays in their pocket, the Daily Mail has learned.

Currently, some families lose more than £1 in benefits for every extra £1 they would earn in employment.

Ministers say ‘marginal tax rates’  – the combination of withdrawn benefits and the tax on earned income – can reach 100 per cent and are a perverse disincentive to the jobless who might find work, or part-time workers offered extra hours.

They send a ‘crazy signal’ to society, they argue.

They are drawing up plans for a welfare reform bill, to be unveiled later this year or early next, which will massively improve the incentives to work.

Work and Pensions Secretary Iain Duncan Smith has warned that welfare claimants are no better off if they come off the dole to take on jobs paying up to £15,000 a year.

His Centre for Social Justice think-tank says millions of people calculate that is it simply not worth taking a job as a result.

A couple with no children where the head of the family works 16 hours a week at minimum wage, for example, is £9.27 a week worse off in work than on benefits.

They would lose Jobseeker’s Allowance worth £100.95 a week, but take home only £91.68 a week in earnings.

High marginal tax rates are also creating ‘poverty traps’ where people can work longer hours or in a better job, but receive only a tiny increase in their overall income.

A lone parent who works twice as hard, earning £200 a week instead of £100, will end up with only £6.80 extra in their pocket because of what they lose in benefits.

A couple with three children, with one person in work, can treble their earnings from £172 a week to £520 but end up just £28.74 a week better off, the research suggests.

There are even certain points on the income scale where those getting a small pay rise end up taking home less money than before because benefits are withdrawn.

A Whitehall source said: ‘Under Labour our benefits system has become outrageously complex and often prevents, rather than encourages, people from getting into the workplace.

‘The current system has left too many trapped in a cycle of dependency, where they fear losing their benefits the minute they become a productive member of society. This is madness.

Right now, I'd be worse off without a job

‘Our work programme will give unemployed people the personalised support they need to get a job and we can pledge that once they’re in work they will get to keep significantly more of the money they earn.’

Those taking jobs would lose a maximum of around 60 per cent of their benefits, ensuring they keep 40 per cent of their earnings from work.

While the measures will save the Treasury money in the medium term as claimants are encouraged to move off benefits and into employment, the proposals will require initial investment – pitching the Work and Pensions Department into a funding battle with the Chancellor.

Currently, 1,895,000 families are hit by marginal tax rates of 60p or more on every extra pound in income.

Despite the coalition’s ambitions to reform the system, last month’s Budget will mean that figure rising to 1,935,000 after 2011/12.

Chancellor George Osborne signalled he is ready to approve a funding switch that will allow cash saved from reduced benefits when people are enrolled in back-to-work programmes to be used to pay for reform.

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