Paul Lewis hosts the BBC Radio 4 programme Money Box Live, a phone-in programme with discussion and advice on personal finance.
Below please find an extract from the Paul Lewis’ blog.
Paul Lewis Money
This blog supplements the paullewismoney twitter with longer comments, explanations and guides.
Sunday, 15 May 2016
Some carers have lost £62.10 a week because the new National Living Wage put their earnings up by £8 a week in April.
The people affected claim Carer’s Allowance – which means they already work unpaid looking after a disabled person for at least 35 hours a week. And they supplement that with part-time work of 16 hours a week on the minimum wage. Most of them will be parents – many single parents; some may be over 60 without a state pension; others may be disabled themselves.
Before 1 April 2016 National Minimum Wage for an adult was £6.70 an hour. For 16 hours work that is £107.20. On 1 April the new National Living Wage rate of £7.20 an hour began for those aged 25 or more, as most carers are. So 16 hours’ work comes to £115.20 a week. One of the conditions for getting Carer’s Allowance is that you do not earn more than £110 a week in a paid job. So before the change in minimum wage carers could work 16 hours and stay below the threshold. From 1 April sixteen hours’ work will put them above the threshold. Once that line is crossed the whole £62.10 a week benefit disappears completely. So an extra £8 a week costs them £62.10 in lost benefit. That is a tax rate of 776.25%.
The simple answer of working fewer hours creates another problem. People on low pay can claim a benefit called Working Tax Credit. This group of people (single parents, some other parents, over 60s under pension age, and those who are disabled) must work at least 16 hours a week to get Working Tax Credit. So if they cut their hours below 16 to bring their pay under the threshold for Carer’s Allowance they stop being entitled to Working Tax Credit. It is worth up to £76 a week for some.
So this small rise in the National Minimum Wage faces this group of carers with the choice of losing a benefit of £62.10 a week or one of up to £76 a week.
Nothing in benefits is quite that simple. If they give up Carer’s Allowance they would not lose the full £62.10 a week. That is because their income is lower and Working Tax Credit might therefore rise – though never by more than £25 a week.
And two things might stop Working Tax Credit increasing. First there is a maximum amount payable and if they are close to or at that level already a further cut in income may not result in a significant rise in Working Tax Credit. Second, the Credit is worked out on annual income in the previous tax year. So it is insensitive to changes in the current tax year. You can apply for it to be changed if income has fallen significantly if your income in the current tax year falls by more than £2500 a year compared to the previous tax year. Losing £62.10 a week for a tax year will pass that test. Assuming of course you ask and HMRC, which administers it, gets the sums right. It often doesn’t.
If the carer also pays rent and council tax they will probably already get help with those expenses through Housing Benefit and local Council Tax Support. Again, a reduced income from losing Carer’s Allowance could mean those benefits rise, though always by far less than the amount they have lost. They will have to apply (remember they are already working at least 51 hours a week plus travelling time doing their caring and part-time job) and hope that the local council works it out correctly and swiftly. Almost all councils in England now have impose a minimum payment of council tax on even the poorest. So those who are paying that will not see it cut further.
But even at the very, very best these carers are going to lose many tens of pounds for a pay rise of £8. Earn £8, lose £40 is not a slogan to encourage work.
Employers say no
Even those who do not claim Working Tax Credit may find cutting their difficult. Employers often structure part time work round standard hours. And because Working Tax Credit needs 16 hours work they may like their part-timers to work that many hours. They are under no obligation to agree to a cut of even one hour to allow someone to claim Carer’s Allowance.
Government refuses to help
When this problem has happened before the Government of the day has often stepped in to raise the earnings threshold so that 16 hours work did not preclude getting Carer’s Allowance. For example, in October 2014 when a rise in minimum wage put people in a similar position the Coalition Government announced a rise in the earnings threshold to £110 a week from the following April. That left the problem for six months but at least it was resolved then.
The obvious answer, which CarersUK would like to see, is to link the earnings threshold for Carer’s Allowance to the minimum wage. It could fixed for example at 16 times the National Living Wage rounded up to the nearest pound. So when the National Living Wage of £7.20 an hour began on 1 April the the threshold would automatically have gone up to £116. Problem sorted.
But the Government has refused to act. It was raised in Parliament on 9 May 2016 by South Shields MP Emma Lewell-Buck
“One of my constituents who works 16 hours a week and is a carer for a disabled relative has discovered that because of the living wage she no longer qualifies for carer’s allowance, leaving her with a substantial shortfall. Why on earth have this Government forced her and thousands of others into this desperate situation?”
But the Parliamentary Under-Secretary of State for Disabled Justin Tomlinson gave no hope of change when he simply replied “The impact of the national living wage will always be reviewed”.
When Radio 4’s Money Box programme asked if there were any plans to change the threshold it was told
“There are no current plans to do so, but we do keep the earnings limit under review and adjust it when it is warranted.”
One barrier may be the cost. Around 80,000 people who claim Carer’s Allowance also work part-time. If even half of them are affected by this rule it will save saves the Government £129 million in 2016/17. And that saving will grow. The Government plans to raise the minimum wage itself to £9 an hour by 2020. That would mean a threshold of at least £144 a week to keep those on 16 hours work entitled to Carer’s Allowance.The National Living Wage may be even higher than that.
Buried deep in the rules is one small glimmer of hope. The income which counts for the Carer’s Allowance earnings threshold is earnings minus half the contributions paid into a pension scheme. So a carer who earns £115.20 a week but then pays £10.40 a week or more into a personal pension (or a pension at work) would bring their weekly income down to £110 and just scrape below the threshold.
Even though these carers earn far too little to pay tax the Treasury would still boost this £10.40 contribution by another £2.60 making a total of £13 going into the fund. Under the rules for stakeholder pensions contributions of as little as £20 have to be accepted. So a fortnightly or monthly contribution into a stakeholder pension would be accepted by any insurance company which offered the product. Stakeholder charges are capped at 1.5% a year. The small fund they build up could be cashed in at any time once they reach 55. If their circumstance remained the same no tax would probably be due on it.
PS A benefit geek writes: when they cash in their pension it may reduce any working tax credit, housing benefit, council tax support, or other means-tested benefit they receive.
This blogpost is an updated version of Carers Stuck in Earnings Trap written in October 2014.
15 May 2016