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In-work poverty - will the next minimum wage increase help?

Luke Whitmore - Law on the Web

  1. 30 June 2015
  2. Employment
  3. 0 comments

In March, the Low Pay Commission recommended that October’s annual increase of the National Minimum Wage should see it rise by 20p, to £6.70. The erstwhile coalition government accepted this proposal, trumpeting it as “the largest real-terms increase in the National Minimum Wage since 2008”.

But how far will this 3% increase go towards alleviating the phenomenon of “in-work poverty”, whereby workers fall below the poverty line despite their employment? And is there anything else on the horizon that might help?

The Trades Union Congress (TUC) has expressed the opinion that the proposal doesn’t go far enough. General Secretary Frances O’Grady commented: “For the low paid to get a fair share of the recovery, this was a year in which we could have had a much bolder increase in the minimum wage.”

Certainly, the upcoming £6.70 rate of minimum wage pales in comparison to the ‘Living Wage’ rate of £7.85 (or £9.15 for those in London) – with this figure based on average living costs, it seems that the minimum wage has a long way to go until it hits the same level. So is there any joy on the horizon for the low-paid?

During Labour’s failed election campaign, Ed Miliband promised that a Labour government would increase the minimum wage to £8 by 2020, with some saying that even this increase was unambitious. The Conservatives’ response to this pledge, however, could serve to help those on a low salary even without a rise in the minimum wage.

They said that if they won the election, the personal allowance – the amount an individual can earn without having to pay income tax on it – would rise to £12,500 during the next five years. They have touted this as a move which would lift those working minimum wage jobs out of income tax entirely, and, with the Tories having won a majority government, this approach seems set to be implemented.

Under this plan, the personal allowance will be tied to the rate of the National Minimum Wage, ensuring both figures increase in tandem. Paying less income tax certainly sounds beneficial to those struggling with low pay, and will no doubt be useful for some, but it’s not all roses.

One point that critics have seized upon is that the new rate for the personal allowance would actually only exempt those working minimum wage for 30 hours a week or less from income tax. Despite the Conservatives’ claims that minimum wage workers would be freed of its burden, the full effect will only be felt by those working part-time; full-time workers will still pay income tax on the portion of their earnings that exceeds the allowance.

Another concern about the scheme has come from those considering the agenda driving such policies. While the outcome of reducing the income tax burden on the low-paid may appear to be effectively the same as that of an increase to the minimum wage, one key issue to consider is that the savings in the former case will come from the public purse, rather than employers.

The idea of taxing workers less and easing the strain on businesses is of course a notion that sounds appealing, particularly to Tory voters, but the dark side of this comes when you consider the inevitable effect on public services. Despite the extensive government cuts made over the past five years, a further £12bn is set to be slashed from the welfare budget over the course of the next Parliament.

The new government has not yet outlined its plans for where exactly these savings will be made, but there are strong indications that around £5bn could come from cuts to tax credits, hitting working families hard. Regardless of the exact details, it seems inevitable that low-paid workers will end up bearing the brunt of these sorts of measures to reduce the deficit. The Conservative plan for lifting them out of income tax may, therefore, involve an effective increase in their cost of living that will wipe out any positive effect it may have otherwise had.

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