Tax Credit inequality

We all know the problems the tax credit system has experienced. As with all things, if it worked correctly we would all be much happier. However, even if the system worked 100% correctly, there is a key element that needs attention.

Below is a letter I am going to send to my MP, the House of Commons and the House of Lords.

Feel free to copy it and send it to your MP if you so wish.



There is a serious floor in the way tax credits are calculated. They are calculated on household income BEFORE TAX AND NI. This has created a key difference in the amount of take home pay between households where one person works and two people work.

In a household where there is one wage earner they only have the ability to take advantage of one tax allowance, whereas in a household where two people work they have the advantage of two tax allowances – with no effect on any tax credit awards.

For example a household where one person earns a salary of £20,00:

Gross Salary: £20,000
Tax: - 3041
National Insurance: - 1719
Net: 15238

If a family has two people who earn £10,000 each, take home pay will be as follows:

Salary 1:

Gross Salary:
Tax: - 841
National Insurance: - 691
Net: 8538

Salary 2:

Gross Salary:
Tax: - 841
National Insurance: - 691
Net: 8538

TOTAL NET £17,076

This is £1838 difference a year or £35 a week extra for the family with two wage earners. If each family has two children they would both receive £50 of Child Tax Credit even though real incomes are markedly different.

Every year when the tax allowances are increased it will benefit one family twice as much as the other. The impact will be even more far reaching if the single wage earner reaches the higher rate tax bracket, where the dual income family don’t.

May I suggest an additional element in the tax credit calculation for families with one wage earner to redress the balance?


Yours Sincerely,


…………………………….
Giving up is easy...... just keep on trying!

Comments

  • Sorry spelling mistake it should be flaw not floor. First line of letter.

    Louise
    Nobody is perfect - not even me.
  • linnyp
    linnyp Posts: 156 Forumite
    But wouldn't the family with one earner be getting the 30 hours + element whereas the family with 2 earners each earning £10K must therefore be part time and wouldn't be getting the 30 hours+ element? So it kind of evens it out doesn't it?
  • System
    System Posts: 178,077
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    linnyp you're probably right but it is possible - it equates to £6.41 per hour. I have seen many claims where the people say they are earning £10000 and working 30 hours and more per week. Only a tiny few are ever investigated by Compliance so I don't know how many are genuine.
  • msmicawber
    msmicawber Posts: 1,962
    Debt-free and Proud!
    Forumite
    I also thought there were different personal allowances for couples anyway - before the calculation for Tax Credits, though probably just for married couples. I'm not sure that your calculations are correct, or at least applicable in all cases.
    Debt at highest: £6,290.72 (14.2.1999)
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  • System
    System Posts: 178,077
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    Community Admin
    Sorry msmicawber but there are no extra personal allowances for married couples that was done away with years ago. Married couples are no longer anything special.
    Tax credits were brought in to replace it. It is paid for claimants up to a total household income of about £59000.00 although it is means tested.
  • dmg24
    dmg24 Posts: 33,925 Forumite
    Simple answer, unless there is a legitimate reason why one person cannot work, then they should get a job!

    What about single parents?
    Gone ... or have I?
  • We all know the problems the tax credit system has experienced. As with all things, if it worked correctly we would all be much happier. However, even if the system worked 100% correctly, there is a key element that needs attention.
    ……….

    Have you not considered that it is the tax tystem that is wrong ? The same argument you put forward is true for a family that does not claim tax credits. As in if a family only has on earner they will be worse off than a family who earns the same but with two incomes...its always been the same...
  • Alleycat
    Alleycat Posts: 4,599
    First Anniversary Combo Breaker First Post
    Forumite
    If there are children involved in any of these families, then there would be the added cost of childcare to consider which would easily wipe out the savings made in Tax and NI. I suppose if they were both only working part-time this could be managed via shift work, but the likelihood would be one full time wage earner and the other part time.
    "I've fallen down a hole" - said in best Monty Python voice-over.
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