Aligning National Insurance and Income Tax thresholds with the Minimum Wage would take half a million people out of tax altogether, says think tank
A full time Minimum Wage worker would be almost £2,000 a year better off after tax under the ‘Living Income’
Every person in full time work should receive a ‘Living Income’, enough money after taxes and benefits to have what the public believes to be a socially-acceptable standard of living.
In a paper to be published later this week, leading think tank Policy Exchange says that presently the current National Insurance thresholds are set at a much lower rate than Income Tax, at around the annual equivalent of £8,000 – £2,000 lower than the threshold above which Income Tax is levied on an individual’s income. By aligning the thresholds with full-time earnings at the Minimum Wage, half a million people on the lowest incomes would not pay any tax at all.
If you aligned the thresholds today, a worker on the median wage (£27,200) would expect to see their after tax income increase to around £30,000. Someone on a full time Minimum Wage could expect to see their annual after tax income increase from £12,000 to £14,000.
The paper says that the companies who wish to pay a Living Wage can do so, but that a compulsory move across the whole economy could have serious consequences on job creation and the unemployment rate, especially among labour intensive small to medium sized businesses.
Policy Exchange acknowledges there would be a significant cost to implement a ‘Living Income’ – potentially up to 2% of GDP, around a quarter of the current fiscal consolidation – but argues that all political parties should include this in their election manifestos as a long term aspiration after the deficit has been eliminated.
The paper sets out a number of options for paying for the policy including capping increases in government spending to around 1% in real terms from 2020 to 2025, using Universal Credit to deliver more targeted increases to income or raising tax rates at the higher end of the scale to make the policy cost neutral.
Steve Hughes, Head of Economic and Social Policy at Policy Exchange said:
“Increasing the Minimum Wage to the Living Wage would give the UK one of the highest wages in the OECD. The majority of the benefits would in any case go to the Treasury in higher taxes, rather than higher living standards.
“To ensure growth doesn’t leave any worker behind, the government should set a long term aspiration that everybody in full time work should receive a Living Income. Aligning the Income Tax and National Insurance rates for those working full-time on the Minimum Wage would take half a million people out of tax altogether.”