The Low Pay Commission’s recommendation that prime minister Rishi Sunak and chancellor Jeremy Hunt raise the minimum wage next year by 9.5% sounds appealing. On analysis, though, the reality is a good deal less straightforward. For some people the change can be only 3%, nowhere near the rate of inflation.
Paying for the rise
The Government announces this rise, from £9.50 to £10.40 an hour, as an act of generosity. In reality, it does not spend a penny, as it is the employer who pays the wages and will cover the increase. And the biggest beneficiary may be the Government itself.
The facts behind the figures
In a family where one parent works 25 hours per week, for example, and is on Universal Credit (UC), this is the breakdown:
- 25 hour week @ £9.50 = £12,350 per annum no tax or National Insurance (NI)
- 25 hour week @ £10.40 = £13,520 per annum, a gain of £1,170 , but the family is now subject to tax and NI on earnings over £12,576
- £944 is therefore subject to tax and NI of £302 which leaves £642
On paper the claimant gains £868 (9.5%) from the rise in the “living wage”. But if the family is on Universal Credit, then 55p in every additional pound is lost as a result of the taper. So they lose £868 x .55 = £477. This leaves them with an actual gain of only £391 per annum (3%).
The real winner is the Government, which spends nothing on this increase, but gains £302 in tax and NI. It also saves £477 on the benefit budget. So the government saves £779. This is a staggering 66% of the projected minimum wage increase, effectively paid by the employer to the Government.
Financial losses for carers
The situation for someone claiming Carer’s Allowance is even worse. Carers can earn up to £132 per week – which equates to £572 per month, or 60 hours at the current minimum rate of £9.50 – and claim Carer’s Allowance of £69.70 per week.
However, at the new living wage rate, the carer would be earning £144 pw not £132. This would have a severe impact on their benefits as the higher pay automatically means they would no longer be entitled to claim the £69.70 pw Carer’s Allowance. This represents a decrease in income of £250 per month.
Hope for carers
Carers should not yet despair. Expenses such as travel may be claimed against earnings for those who qualify, which could reduce the new earnings to below the £132 limit.
In addition, carers can claim 50% of any contribution to a private pension. If earnings went, as in this case baseline, £12 per week over the limit, a carer could contribute £24 per week to a pension, claim 50% of that against their wages and still qualify for Carer’s Allowance. Around £100 per month seems a lot to pay into a pension if the carer is only earning £144 per week but that still enables them to claim the £69.70 per week Carer’s Allowance. The other option, of course, would be to reduce their hours, but this obviously is the employer’s choice, not the carer’s.
Carers should always check with the Department of Work and Pensions (DWP) first before making any changes to their working hours, as they might have ways of adjusting amounts that are not in the public domain. It’s always sensible not to ignore the situation though. Even if a carer only goes over their earning’s limit by a few pounds, the DWP will not only stop the money when it comes to light, but will also reclaim any overpayment.
There is only one winner when it comes to the poorest, and it is never the poorest. It is always the government.
