Legal News

The Institute for Fiscal Studies (IFS) has published comprehensive analysis of the impact of the government’s current tax and benefit plans – and the National Living Wage – on household incomes and financial work incentives.

The study has been published as Chancellor George Osborne announces his Autumn Statement this week.

The IFS report focuses on the effects of government measures and changes proposed in the July Budget and how these may affect work incentives.

The reports finds that, both the package of tax and benefit changes and the new National Living Wage will, on average, strengthen incentives to move into paid work – and encourage people to work more, if already in work.

However, IFS researchers found that, within the overall picture, the effect of the tax credit changes on work incentives will vary between different groups.

The report suggests that the tax credit changes will weaken incentives for lone parents to move into work – but will strengthen the incentive for both members of a couple to work, rather than just one.

For those looking to work more, although the tax credit changes will increase by a million the number of workers who will keep at least 40p of every extra pound earned, they will also increase by half-a-million the number of workers keeping less than 20p of each extra pound earned.

The IFS also says that a key finding is that the government’s tax and benefit changes to be introduced between now and 2019–2020 will, on average, strengthen people’s incentives to be in paid work – despite the £4.4 billion planned cuts to the tax credits received by working families. Cuts to the in-work support provided by tax credits mean that the impact of the changes on work incentives is “relatively modest”, given the size of the £12.5 billion overall cut to working age benefit spending, says the IFS.

The report suggests that cuts to benefit spending tend to strengthen work incentives, as people will see bigger increases in income if they move into work, or work more hours.

The factors driving the strengthening of work incentives include increases in the income tax personal allowance, as well as the higher rate tax threshold and cuts to benefits for workless families – which increase in-work incomes, but reduce out-of-work incomes for many of those who are not entitled to tax credits when in paid work.

The impact of the cut to in-work tax credits will also be different for different groups, says the report – with around 6.7 million people experiencing a larger cut to in-work tax credits than the cut in out-of-work benefits, potentially affecting their incentive to be in paid work.

“These changes will on average weaken incentives for lone parents and those in couples whose partner does not work,” say the researchers – who add that reducing the amount of support given to single-earner couples through the tax credit system “will strengthen the incentive for both members of a couple to work rather than just one, as they will have less support to lose if the second person starts paid work”.

The IFS estimates that around 8.6 million people with a working partner will see their work incentives strengthened by planned changes to the (pre-Universal Credit) benefit system.

The July Budget reduced the amount of support Universal Credit would offer working families.

However, the researchers say that tax credits are being cut “more severely than Universal Credit” – and therefore, Universal Credit will increase the amount of support given to single-earner couples, particularly those with children.

The IFS says this will “strengthen the incentive for one member of a couple to work (rather than none) – but weaken the incentive for both members of a couple to work rather than just one, as the additional support given to single-earner couples is withdrawn when the second member of the couple enters paid work”.

The full report is available via the IFS website.

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