Memorandum submitted by Roger Cockfield
I set out my representations below. These show
that for many on state benefits, saving has a disastrous impact
on net income. A marginal tax rate of 452% on savings income must
put off all but the fanatic.
I have been working on the integration of income
tax, social security and national insurance contributions for
a number of years. I gave a paper on this at the ATAX Conference
in Sydney in 2000. I also submitted written evidence to the Social
Security Select Committee, which was published in their 7th Report
on Pensioner poverty, 2000 at pages 134-137. I have been cited
as an expert on tax/benefits in House of Commons debates on a
number of occasions. Prior to retirement, I was Reader in Taxation
at De Montfort University.
My model of the tax and benefit system has considerable
flexibility allowing income, capital, rates, tapers, allowances
and family structure to be changed as desired. This allows one
to judge the likely impact of changes on an individual.
1. SUMMARY
For many on benefits, saving has a disastrous
impact on net income. A marginal tax rate of 452% on savings income
must put off all but the fanatic.
2 IMPACT OF
STATE BENEFIT
SYSTEM ON
SAVING
A couple have two children, pay rent of £53.13
and council tax of £14.60 but incur no childcare costs. The
husband works 16 hours to earn £100 per week.
His net pay is £98.14, child benefit £27.55,
working tax credit £58.76, child tax credit £72.94,
housing benefit £22.40 and council tax benefit of £5.15.
Their savings of £3,000 does not yet effect their benefits
but generates weekly interest (after tax) of £2.08.
His net income [defined here as income after
tax plus all benefits received less rent and council tax paid]
is £219.28.
If he saves, the impact on his net income is
as follows:
| Capital | Net Income
| Marginal Deduction Rate |
| £3,000 | £219.28 |
n/a |
| £4,000 | £216.57 |
452% |
| £5,000 | £213.86 |
452% |
| £6,000 | £211.15 |
452% |
| £7,000 | £208.45 |
452% |
| £8,000 | £205.72 |
455% |
| £9,000 | £202.97 |
457% |
| £10,000 | £200.53
| 417% |
| £11,000 | £198.52
| 361% |
| £12,000 | £196.68
| 340% |
| £13,000 | £197.09
| 47% |
| £14,000 | £197.50
| 47% |
For this couple saving has a disastrous impact on net income.
A marginal tax rate of 452% on savings income must put off all
but the fanatic.
I have used the example from page 125 of the DWP Tax Benefit
Model Tables 2004 so that the starting figures can be readily
confirmed. From this starting point, I have recalculated the level
of benefits for differing levels of capital.
3. TAX BENEFIT
MODELS
It is important to look at the impact of all benefits on
the decision to save. The published DWP Tax Benefit Model Tables
only covers those below pension age [there is no pensioner series]
for whom capital is assumed to be below £3,000. This assumption
might be acceptable when considering the historic welfare recipient
like the unemployed. It is seriously deficient for today's benefit
system which covers a substantial part of the population, who
one hopes has saved some capital over their lifetime. A further
drawback is that I have been unable to fully cross check my own
model against the DWP one.
4. DEEMED INCOME
RULES AND
DEFINITION OF
CAPITAL
If we want people to save, the deemed income rules (for HB,
CTB, and PC) need to be scrapped. Instead of deemed income, use
actual income. The cut off at £16,000 (for HB and CTB) needs
to be substantially increased if not abolished. To encourage savings,
there is a need to re-define what is meant by capital. At present
someone with a £500,000 equity in his home is not caught
by the capital trap. Yet someone with £16,000 in the bank
but no equity is barred from Council Tax Benefit.
5. REFORM OF
THE TAX/BENEFIT
SYSTEM
The tax/benefit system lacks any form of coherence with overlapping
and interacting tax and benefits administered by different authorities.
Definitions of income, capital and period of assessment all vary.
The excessive marginal rates of effective tax create a welfare
dependant society.
There are numerous problems; for example some benefits are
income means-tested, some capital means tested, others neither.
Income tax is based on the income of the individual, whilst benefits
are based on the income and capital of the couple married or not.
6. ABBREVIATIONS
CTB—Council Tax benefit
DWP—Department for Work and Pensions
HB—Housing Benefit
PC—Pension Credit
January 2006
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