Some 20 years ago we started making fun of the Living Wage people like the JRF. Every time they came out with an insistence that, you know and actually, the minimum wage needed to be higher we did the sums. Having done the sums we then gleefully pointed out that the difference between that living wage and the minimum was the amount that low income people had to pay in income tax and NI.
This was, obviously, nonsense. The minimum wage is, by definition, that amount that society says someone must righteously earn for their labour. That there should be no minimum wage at all, that it’s £0, is also true. But that argument for having a minimum set by statute is “Guys, this is the just and righteous minimum!”
Therefore the government, the Chancellor, doesn’t get any of it - it’s the just and righteous value of that labour.
The reason why those on minimum wage were getting taxed was fiscal drag. Don’t increase the tax free allowance in line with inflation, don’t adjust it for rising real wages. Over a generation the threshold for paying income tax migrates from it being something that only hits the middle class and above to being something that someone working part time on minimum wage has to pay. Which is an absurdity.
Which we kept pointing out. Along with the demand that the personal allowance for both income tax and national insurance be raised to the full year, full time, minimum wage. This also actually worked. The CPS had worked on George Osborne, we (and we know this to be so) convinced Nick Clegg and the LibDems, come the Coalition it became so.
Yes, it took time to be brought in but that’s why the personal allowance is now £12,500 a year. Because that’s what the full time, full year, minimum wage was back when the Coalition signed onto the idea.
At which point:
Should income tax thresholds be raised?
Millions more households will be pushed into higher tax brackets by 2028. We ask two experts if they think this sneaky way of raising tax is fair
We have views on those higher brackets. But we are adamant about that initial threshold. The personal allowance should be, must be, at the minimum wage at minimum. Not to do this is not only sneaky it’s vile.
Consider, for a moment. The current minimum wage is £10.42 an hour. The average (full time) work year is 1,866 hours. The personal allowance is £12,570. Gross annual income is £19,443. Minus the allowance, that’s £6,873. Which is then taxed at 12% NI and 20% income tax. £2,200 a year.
The working poor, those making only that legislated minimum wage, should be taxed £2,200 a year on their incomes? No, monstrous.
So, we’re going to have to do it all over again, aren’t we? The personal allowance for income tax and NI must be the full year, full time, minimum wage. And that needs to be set into stone as policy. Change one change the other, no ifs or buts or this is just a temporary measure for hard times.
Of course, this will produce a revenue problem. Some 30 million working in the UK, if all of them pay £2,000 a year less in tax then that’s £60 billion in revenue foregone. Which is, given the (2021/2) total spend of some £1,180 billion, about 5%.
But we’d remind of O’Rourke’s Principle of Circumcision. You can take 10% off the top of absolutely anything.
People shouldn’t be paying income tax on the minimum wage. So we’re going to have to do this all over again, aren’t we? Gird the loins and once more into the breach - lower taxes for poor people!