Yes, you’re (still) better off working than on benefits

New analysis shows that you’re still better off in low paid work than on benefits, but the financial advantages have shrunk for some.

Three years ago I wrote a blog about this, and new analysis shows that you’re still better off in low paid work than on benefits, but the financial advantages have shrunk for some. The answer to this lies in improving take-home pay and reducing costs, not more cuts to out-of-work benefits.

A single person without children is better off in work than three years ago…

Let’s first look at Jake, a 25-year-old single man seeking work. Using data from the JRF Minimum Income Calculator, if he rents a modest one-roomed flat, he will receive each week:

  • Jobseekers Allowance of £73.10
  • Housing Benefit of £86.11 (enough to cover most but not all the £89.70 rent on his flat)
  • Council Tax Support of £13.40 (enough to cover most but not all his £15.76 bill)
  • leaving a total disposable income of £67.15

That’s over £3 a week LESS in absolute terms than three years ago. The gap between his housing costs and the benefits to cover them has grown and he’s far short of a decent living standard. However, if Jake gets a job full-time on the minimum wage (£7.50 per hour), then he’d:

  • earn £281.25 gross a week
  • pay £12.14 in income tax and £14.91 in National Insurance
  • get nothing at all in Housing Benefit, tax credits or council tax support, as this level of earnings is too high to be eligible
  • have a total disposable income of £148.74 (after paying rent and council tax)

That’s only an extra £82 for 37½ hours a week of hard work, but £20 more than in 2014. This isn’t adjusted for the increase in prices since then but it shows the gap between benefits and work for single, childless adults gone quickly upwards. That’s due to freezes or cuts in benefits as well as the introduction of the National Living Wage.

Of course, Jake pays more in tax and NI than in 2014 because of the minimum wage hike – he’s earning more and better off despite paying around £280 extra a year in tax. If Jake was switched onto Universal Credit, he’d be no worse or better off financially as it basically mirrors the old system for simpler cases like this (notwithstanding issues with the administration of UC).

A family of four with one worker is worse off in work than three years ago…

But how does Jake’s experience compare with the way families with children have fared over the last few years? Mr and Mrs Clark, parents of two primary school-aged children, would receive these benefits each week if they were both out of work:

  • JSA £114.85
  • Child Benefit £34.40
  • Child Tax Credit £117.18
  • Housing Benefit £91.05 (covering all the rent on their 3-bed council house, unless in some circumstances they’re subject to the bedroom tax)
  • Council Tax Support £20.83 (covering most of their £24.51 bill)
  • leaving a disposable income of £262.75

If Mrs Clark gets a full-time job on the National Living Wage, then they would:

  • get gross earnings of £281.25 (the same as Jake)
  • pay income tax of £7.73 and NI of £14.91 (income tax is £230 a year lower than Jake because of the transferable Marriage Allowance)
  • get Working Tax Credit of £26.87 and the same level of CB and CTC as when out of work
  • get a much-reduced HB of £8.46 (and no CTS)
  • leaving a disposable income of £330.06

That’s an additional £67 disposable income each week from one of them working full-time – about £6 less than three years ago and less in absolute terms than Jake (who gets £82). The incentive to work has gotten worse because of: the tapering of in-work benefits with rising earnings, a small additional cut in Housing Benefit and an increase in NI paid. The rise in the minimum wage, less income tax paid and slight rises in child-related benefits are not enough to offset this. In contrast, the disposable income of the Clarks when out of work is virtually the same as three years ago – but they would still be around £200 short each week of what the public think a family of four needs for a decent living standard.

If the Clarks moved onto UC, it would make barely any difference if they were both still unemployed – in fact, they’d be 13p a week worse off. But being in work on UC would leave them around £35 a week better off than on the old system; that’s over £1,800 a year. Unfortunately, they are in the minority as many other family types will be relatively worse off on UC, given the cuts that have been made to it.

Still better off working than on benefits (mostly)…

The fortunes of Jake and the Clarks have diverged. Financial incentives in the non-UC system have worsened for families to move from zero to one worker but have improved for single childless adults. UC doesn’t help Jake but its more generous treatment of the Clarks boosts their income considerably.

While these simple examples show that the system is still designed to make people better off when working, whether on UC or tax credits, there are additional complexities that could undermine this. That includes travel and other costs associated with working, expensive childcare and housing that might not be fully covered by benefits, or passported benefits that can be lost when people move into a job. These can all cut into the narrow margin of the extra £70 or £80 per week that these two households might typically see in their pockets when working full-time on the NLW.

Given how low the levels already are, it would be hard to argue that out of work benefits should be cut back further to increase the incentives to work. Action should be taken on reducing the cost of living (especially housing and childcare) and improving earnings, by ending the benefit freeze, restoring work allowances in UC, continuing to ramp up the NLW, reducing taxes on income and improving opportunities to progress in work.