Make Work Pay
Keep more of
your next hour.
Work should always pay. For some people it barely does, because the benefit system takes back most of every extra pound earned. This is not about willingness to work. It is about how the withdrawal is designed. Pick a situation and see what is kept.
See it
Understand it
Universal Credit is withdrawn as earnings rise, at a taper of 55p for every extra pound of net pay. Stack income tax and National Insurance on top, and a working parent can lose around two-thirds of each extra pound. At a few sharp points, such as the loss of free childcare above £100,000, a pay rise can even leave a household worse off. These are the highest effective tax rates in the system, and they fall on people trying to work more.
None of this is because the people involved lack drive. It is a design choice: how steeply support is withdrawn, and how badly the tax and benefit systems are joined up. That design was built by governments of both parties, and it can be rebuilt so that work always pays.
Fix it
Lower the taper
Reduce the rate at which Universal Credit is withdrawn, so keeping more of each extra pound is guaranteed and the reward for working more is clear.
The trade-off
Costs more in benefit paid to people further up the earnings scale, which has to be funded.
Raise the work allowance
Let people earn more before any withdrawal starts, so part-time and low-hours work clearly pays and the first steps into work are rewarded.
The trade-off
A direct cost, best targeted at the groups where it changes behaviour most.
End the cliff-edges
Smooth the sudden losses, such as childcare support disappearing at a fixed income line, so no pay rise ever leaves a family worse off.
The trade-off
Tapering a cliff spreads its cost over a wider band of earners.
Sources & method
- House of Commons Library · Universal Credit: the 55% earnings taper and work allowances.
- Institute for Fiscal Studies · effective marginal tax rates.
- GOV.UK · Tax-Free Childcare: support withdrawn once an earner passes £100,000.
Keep rates are indicative round figures illustrating the combined effect of the Universal Credit taper, income tax and National Insurance. Individual circumstances vary. For the prototype the figures are illustrative rather than a personal calculation.