Background

The tax and benefit system is in a period of considerable flux. Universal Credit (UC) was announced as a simplification to ensure that claimants would always be better off from entering work or earning more. However, it has brought new complexities: a long transition, complex self-employment rules, and new interactions with other parts of the system.

Prior to 1997 and 2010, opposition parties criticised poor work incentives and used this as a rationale for major reform once in office. Yet under UC, four million people will still face Marginal Deduction Rates of at least 70% and 2.5 million Personal Tax Rates of at least 70%.

Since the original design of UC, there has been considerable policy change. Major cuts were introduced throughout the benefit system, some of which have transition periods lasting until 2035. Support for children, pensioners, disabled people, working age adults, and for housing costs, were affected very differently, reducing further the coherence of the system. We have also seen divergence between Scotland and the rest of the UK, and changing interactions between National Insurance and income tax.

Since 2015, most research has focused on claimant experiences: for example, the sanctions and conditionality regime. Beyond estimates of gainers/losers, there has not been a systematic analysis of the post-2015 design of the system, nor of work incentives given the changes highlighted.

This project will identify where, and why, work incentives remain poor for so many people by conducting a comprehensive study of work incentives throughout the tax and benefit system. Findings will be of direct interest to politicians, policymakers and think-tanks, particularly in their consideration of labour market behaviour. It will also provide evidence that can be used by organisations who campaign on behalf of specific sub-groups of the population.

Outcomes

• Document comprehensively incentives to work and increase earnings in the post-2015 tax and benefit system, identifying groups and characteristics subject to the highest disincentives
• Explain which features of the tax and benefit system create the highest disincentives
• Make recommendations for policy changes to reduce the incidence of high disincentives

Relevant Links

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