Government should relax 55% Universal Credit tax

Robert Salter, Director said:

It is interesting to note that the Government has specifically promised to focus on getting the unemployed (and under-employed) back into work, as part of the recent King’s Speech.

Whilst no one could seriously challenge the need for the Government to get the unemployed and under-employed back into the Labour Force (or more fully engaged in the Workforce where they already work some hours), it will be interesting to see what this policy announcement actually means in practice.

Will the Government relax the effective 55% tax rate (in terms of a reduction in an individual’s Universal Credit payment), which can presently apply when a UC beneficiary works a few extra hours? Given that the top rate of income tax in the UK is officially 45% – and most people pay income tax at considerably lower rates than that – it is clearly inequitable that UC recipients – people who innately have lower incomes than most – can have a headline ‘tax rate’ of 55%.

This clawback of Universal Credit means UC claimants may be worse off if they work more hours, especially as they can also be liable to PAYE and NIC in addition to the 55% clawback referred to above, which is counter-productive if your goal is to decrease underemployment.

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