The implications of changing the income taper
Why a change to the taper does matter, and why it doesn’t
One of the most common queries we’ve had about the impact of Council Tax Support has been how the taper affects the incentive to work. Whilst we agree that the taper is an important issue, it’s not for the reasons most people assume. The taper makes hardly any difference to the incentive to work, but it does determine how a benefit cut is shared across working and non-working groups.
Why the taper doesn’t matter: work incentives
The taper determines how much benefit people lose as their income increases. Under council tax benefit (CTB) it is set at 20%. So crudely speaking for every extra £1 in income, 20p is lost from CTB. This is why people link the taper to the incentive to work: the higher the taper than the less the incentive.
Of course the CTB taper is not the only thing that comes out of income. As low income working people work more, they lose money from their tax credits and pay more in national insurance and income tax. These three items amount to a 73% loss – so for every extra £1 earned the individual only gets 27p. This is all before we even consider the CTB taper.
The main mistake people make then they apply the CTB taper is to add it to the 73%. So 73% + 20% = 93%. Under this circumstance for every extra £1 of gross-income, net-income only increases by 7p! This fortunately is not the case. The correct way to apply the 20% CTB taper is to what remains after the 73%. So someone losses 73% of their £1 and ends up with 27p, then they lose another 20% of what remains leaving them with 22p. This isn’t much, but it is more than 7p.
This initial rate of 73% is extremely high and can understandably be argued as a disincentive to work. But it also means that changing the taper under council tax support (CTS) doesn’t make much of a difference. Take these examples:
- A 20% taper (the current system) applied to the 27p: 22p for every extra £1 earned
- A 15% taper applied to the 27p: 23p for every extra £1 earned
- A 25% taper applied to the 27p: 20p for every extra £1 earned
- A 30% taper applied to the 27p: 19p for every extra £1 earned
The point is that the loss from tax, national insurance and tax credits does much more to the incentive to work than a change to the council tax support taper would.
Why the taper does matter: it determines if working or non-working people take a tougher hit in April
But changing the taper matters when you look at it from the perspective of how it impacts working people already claiming CTB in April.
A common CTS scheme involves assessing entitlement on 80% of council tax liability (when before it was 100%). So for someone with council tax of £20 per week, regardless of income they would be have to pay the first £4 and would then be assessed on their ability to pay the remaining £16. If under CTB they receive full council tax benefit of £20 per week now they will lose £4 in April (and get £16). Someone who gets only partial benefit of £10 also loses £4 (and gets £6).
But if on top of that the taper increases to 25% the impact is no longer uniform. The person who previously got £20 still loses £4 as their benefit is not subject to the taper. But the person on £10 benefit is subject to the taper and in April will lose £6.50 per week (and get £3.50 in benefit). So this means that working people are hit harder than the non-working by the new CTS system.
Likewise lowering the taper to has the opposite affect: people on full council tax will not benefit from the taper change but low income working people do. If the taper is lowered to 15% the person on the full £20 benefit still gets the £4 cut but the person on £10 benefit is only cut by £1.50 because decreasing the taper counters some of the loss from lowering their council tax liability.
All in all, the taper hardly matters in terms of changing the incentive for people not working to start work or for people who are working to do more work. But come April the level at the taper is set at will be critical in determining how dramatic a hit working people take, or if they are in fact cushioned more than the non-working.