This is a quick update to my posting of two years ago, looking at the real gains (and for whom) of the increase in the National Living Wage (NLW).  You can read that in my blog at https://benefitsinthefuture.com/national-living-wage-cui-bono/.

Once again, this year, the government have proudly told us that the substantial increase in the NLW rate will mean a big increase in income for the poorest paid. Once again, this year, the figures may show otherwise.

I’ve also taken the opportunity to look, again briefly, at the effects of the announced increase, from July, of the National Insurance (NI) threshold. This, together with the increase in the NI rate for employees and employers as the precursor of the social care levy, affects the majority of working people.

But to their advantage?

We’ll start with the effect of earnings at the NLW level for somebody working 35 hours a week. All the figures in the tables are weekly.

Table 1

Table 1 shows that someone working at that level will see an increase in their take-home pay for of almost £13 a week this April and a further increase of almost £7 a week after the NI threshold increase in July.

That’s not going to help meet all the cost of living increases that are facing people but it is something. After all, these are amongst the poorest workers that the government is trying to help.

The government is already helping many of them, of course, through the benefits system and the extra net earnings are going to be very welcome. Or they would be if they were extra.

The reality is that the government gives with one hand and, often, takes with two.

Most means tested benefits, unsurprisingly, pay you less when your resources increase.

The increase in net earnings will change any means tested benefits that are being received. If somebody, typically, is getting help with rent through Housing Benefit (HB) and council tax through Council Tax Reduction (CTR) then 65% of any increase in net income is taken away from HB and another 20% typically, from CTR.

That changes the picture a little.

Table 2

This April’s increase of over £20 a week in gross earnings, becomes a less impressive £1.95. If somebody is getting help from the newer Universal Credit, the figure’s similar if a little more generous, thanks to the reduction in the taper rate introduced late last year.

Table 3

Remember that those receiving Universal Credit lost, last year,  the £20 a week uplift that had been given to them as part of the Covid response.

Qui redddit?

In the previous blog post, I asked who benefits, but it’s also worth reconsidering who pays. Tax cuts and benefit increases, along with changes to minimum wages, are presented as government generosity.  Sadly, this doesn’t stand up to examination.  Wages are paid by employers, from which employees pay deductions including tax and NI.  Employers pay an additional NI amount, which has increased this April because of the NI / social care levy. That adds to the cost of any increase in NLW.

Table 4

Table 4 shows the additional weekly cost to the employer of the increase in NLW and employers NI.

Table 5 shows a summary of the 2022 changes and the consequential effects.

Table 5

We can see that the government the government requires employers to pay nearly £25 a week extra to full-time workers on the NLW.  The worker on means tested benefits may get as little as 7.8% of that with the government receiving or saving the other 92%.  From July, their take reduces a little to about 88% of the extra pay. For those on Universal Credit, it’s 87% for the government in April reducing to 80% in July.

This is what it looks like annually:

Table 6

It’s difficult not to admire the skill with which the government presents themselves as giving generously, actually gives the worker little, makes the employer pay all the costs and takes the bulk of the money for themselves.

While this looks like a stealth tax on employers, consider one element of what is causing the increases in inflation and in the cost of living. Increases being passed on by employers facing extra costs in their workforce.

A vicious circle?