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Wages, Wages, Wages

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We are currently seeing a period of disquiet within parts of the civil service regarding their pay awards and one statement made was that in real terms take home pay for civil servants will have dropped 20% according to the PCS union. It is fair that civil service pay has been capped or frozen as has most of the entire UK workforce but it is not that where I turn my attention.

The minimum wage has just increased by a little over 3% to £6.50 per hour and that has had a major impact on many businesses and Government finances. One of the major areas where the minimum wage has an impact is the care industry and in particular care homes. One client of mine will have to find a minimum of £200,000 per year as a result but authorities who meet the care fees of the residents in most of their homes will be seeking no increase in fees. But this is a further aside when we look at the minimum wage. How is the minimum wage calculated - we are told that the basic living wage outside of London is advised as £7.65 per hour.

The Government has gone to great lengths to promote the increase in the personal allowance for tax purposes to £10,000 but keeps quite that National Insurance starts at £7,956.  This means that someone on the minimum wage working a 40 hour week will pay £1,371 in tax and national insurance or 10.15% of total income to the Government. I appreciate that the person might be entitled to benefits but I would ask why - if the Government sets a minimum wage then surely they believe that that is the minimum someone should receive; though, of course, it might be that they imagine full time employment is a 23.5 hour week which would reduce the pay out of tax and NI!

If we use a similar calculation on the living wage then the tax take goes up to £2,137 or 13.43%. However, to put matters into perspective, the currently promoted average wage in the UK of £26,500 equates to about £12.50 per hour and would pay £5,525 or 20.85% in income tax and national insurance.  This highlights the nonsense of the headline basic rate of tax at 20% couple with the tax free allowance of £10,000 when the Governments tax take on someone in employment earning the national average wage is already paying a total in payroll taxes of over 20% of Gross pay. If the individual had not been employed but received the same 'income' from investments they would be £2,225 or 8.40% better off - this is the tax penalty we pay for being in employment.

The average UK employee is not particularly interested in the calculations I have shown above but in reality are just interested in the amount of money they have to take home and those with smaller employers are still to feel the impact of auto enrolment. When I first started work as an accountant there was an investment income surcharge and national insurance was very much lower but now the former has gone and the latter is a major deduction to the average payslip.

If our economy is to recover properly we need to have a simpler approach from Government with more joined up thinking and greater transparency. We all accept that Government needs to raise money and payroll taxes are one of the simplest ways but let's have some logic to tie together the minimum wage, the personal tax free allowance, the starting point for national insurance and the inequity of the higher tax burden on people in work than those not in work.

Jonathan Russell

Partner

ReesRussell

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