Pay Rise Triggers Poverty Trap

What a shock! The poverty trap is alive and well.

West Wales has many people on modest wages, and this is the sort of trap they face.

Take the simple case of a single person, childless, over 25, working 30 hours a week for £7.20 an hour. That amounts to £216 a week, £11,232 a year. Let’s call the worker Dan. In 2015-16 Dan pays £46.40 income tax, £380.64 national insurance, and £112.32 in pension contributions, deductions of £539.36. Dan receives a top-up of £797 in working tax credit, and so his net income for the year is £11,489.64.

For 2016-17, Dan’s employer offers him a pay rise of £468 to £11,700 a year. Dan is pleased at first, then works out how much extra cash he would get.

The answer is £121.76 – for a whole year.

Tax, national insurance and pension contributions go UP, to £140, £436.80 and £117 respectively, and working tax credit goes DOWN to £605.20.

Almost three-quarters of the pay rise, 74%, is consumed by extra deductions and reduced benefit.

Not exactly a great incentive!

PDR