New Joseph Rowntree Foundation Report
The Joseph Rowntree Foundation in a report published in December 2017 say that 14 million people live in poverty in the UK – over one in five of the population. - eight million working-age adults, four million children and 1.9 million pensioners. Eight million live in families where at least one person is in work. Latest 2015/16 figures show that the majority of children in poverty are in working households. The single biggest group of children are children of couple families where at least one both parent is in work. A couple with two children needed to have almost three times as much income as someone without children to avoid being in poverty. The income tax system takes no account of this.
A new report by the Joseph Rowntree Foudation (UK Poverty 2017) analyses poverty trends over the last 20 years and considers the prospects for the future. There has been a significant fall in poverty among children and pensioners. But very little progress was made in reducing poverty among working-age households without children. In more recent years, poverty rates have started to rise again among both pensioners and families with children.
Key points from the report are:
Poverty among children and pensioners has risen in the last few years. 30% of children and 16% of pensioners now live in poverty.
One in eight workers live in poverty – 3.7 million.
47% of working-age adults on low incomes spend more than a third of their income (including Housing Benefit) on housing costs. More than a third of working-age adults receiving Housing Benefit now have to top it up out of their other income to cover their rent.
30% of people living in a family with a disabled member live in poverty, compared to 19% of those who do not.
Nearly a quarter of adults in the poorest fifth of the population experience depression or anxiety.
More than one in 10 working-age adults in the poorest two fifths, and around one in six pensioners in the poorest fifth, are socially isolated.
20% of those in the poorest fifth have ‘problem debt’. 70% of people in work are not contributing to a pension.
Twenty years ago a third of children lived in poverty; this fell to 27% in 2011/12. It is now back to 30% - 4 million children. There are twice as many children in working households than in workless households. There are 2.5 million children in couple families and 1.5 milli0n in single parent families although only a comparatively small number (5%) of couple childen are in persistent poverty.
Comment: the tax and benefit system is failing children in couple households.
Some key statistics from the Report (p 10):
Number of people in poverty Poverty Poverty Rate
People in poverty 13.9 million 22%
People in persistent poverty 4.6 million 7%
Children in poverty 4 million 30%
Working age adults in poverty 8 million 21%
Single working age adults no children 2.9 million 25%
Working age couples no children 1.6 million 12%
Working age lone parents 0.9 million 46%
Children in lone parent families 1.5 million 47%
Working age parents in couple families 2.6 million 22%
Children in couple families 2.5miilion 24%
Working age adults and children
in workless families 4.1 million 63%
Children in poverty in workless families 1.3 million 73%
Working age adults and children in
working households 8 million 18%
Children in poverty in working
households 2.7 million 23%
During the last 20 years poverty rates have been consistently high among children and their parents.
However, over the last 20 years there have been very significant reductions in poverty among those working-age families particularly at risk: lone-parent families and families with three or more children. The risk of poverty for children in families with one or two children barely changed over 20 years. However, poverty among families with three or more children has started to rise again – reaching 39% by 2015/16 (even before the two-child limit on benefits and tax credits was introduced in April 2017).
Poverty rates among couples without children have always been low and have changed very little.
Two factors, the Report says. drove the falls in poverty among families with children. First, successive governments chose to increase support for these families through the benefit and tax credit system. Benefits for out-of-work families not only kept up with prices, between 2000 and 2013 they rose in comparison with average incomes. The introduction of tax credits meant that those in work but with low earnings were also supported. These decisions meant that these families saw their living standards move closer to those among the rest of the population and were protected from the worst effects of the 2008–09 recession. Second, there were big reductions in worklessness and rises in employment. These were accompanied by rising skill levels and increased wages for the low-paid due to the introduction and raising of the minimum wage.
The Report does not mention the high “effective marginal tax rates” working families faced if they claimed tax credits and/or housing benefit. Tax paying families claiming tax credits have only been able to keep 27p from every extra pound earned and those claiming in addition Housing Benefit have only been able to keep less than 10p. High marginal rates have reduced the incentive for families in poverty to increase their earnings. The marginal rate is the amount, the Government takes back in income tax, national insurance contributions and reductions in tax credits and benefits) from every extra pound earned, A family with a marginal rate of 90% needing to increase their income by £100 to escape poverty would need to increase their earnings by £1000.
The Report also fails to mention that tax credits did not take into account that couple families require a higher income than comparable single parent families to be above the poverty line (see below) but received the same tax credits. It is perhaps not surprising that the number of children in poverty has remained so high not withstanding tax credits. Either tax credits are wrong or the way poverty is measured is wrong. Both can not be right. In work couple families would have been adversely affected by high marginal rates.
Since 2013, the Report says,the reductions in poverty among families with children have gone into reverse. Their poverty rates are rising, largely due to reductions in the support provided by benefits and tax credits. Tax cuts and minimum wage rises are beneficial for some, but for many low-income families, the gains are far outweighed by reductions in the more targeted support given by the benefit and tax credit system.
For low income families the gains would in any case have been very small as increases in income may have resulted in additional tax and employee national insurance contributions and loss of tax credits and other in work benefits.
The Report says that financial pressures faced by families on low incomes have been exacerbated by increases in the cost of essential goods and services. The proportion of working-age adults in the poorest fifth of the population who spend more than a third of their income (including Housing Benefit) on housing costs has risen from 39% in 1994/95 to 47% in 2015/16. This is partly due to far greater numbers now living in the private rented sector, but has also been affected by increases in the cost of social rented housing and reductions in the benefits intended to help low-income families afford it. The cost of childcare has also increased substantially. People on low incomes spend proportionally more of their income on food and fuel, and fuel prices have increased faster than overall inflation. This means that since 2003, people on low incomes have also experienced consistently higher inflation than those with higher incomes, despite having far less scope to reduce spending.
The report says (p 45) that in 2017 a couple with two children 9 (aged 2-4) needs £405 per week to have a basic standard of living (not including rent, Council Tax or childcare) whereas a working age single person needs £191 per week. Their disposable income needs to be 2.3 times more than a single person. A couple without children needs £324 per week and a lone parent with two children aged 2-4 needs £368. The couple with two children needs to have 40% higher income than a couple without children and 23% more than a lone parent family. A lone parent with 2 children needs twice as much income than a working age single.
Income tax takes no account of the fact that the financial needs of a taxpayer with children are much bigger than those of taxpayers without children. They pay the same income tax.
Tax credits, unlike benefits, have not taken account of the fact that financial needs of couple families with the result that number of couple families in poverty have not come down as much as would have been the case if tax credits had been structured in the same way as other benefits. Universal Credit works differently.
What is Poverty and how is it measured?
Income tax is based on the income of the individual. When working out whether someone is in poverty income is measured on a household basis. For analytical purposes income is sometimes measured before housing costs are taken into account (BHC); in other cases after housing costs are deducted (AHC). Although the Government figures are usually presented on an BHC basis the AHC figures are regarded by many economists as a better measure of whether a family is in poverty and this the measure of poverty the Rowntree Report in the main uses. A family is regarded as being in poverty when it has an income after housing costs of less than 60% of median income for their family type. The most recent poverty lines for four illustrative family types are provided below.
It is important to understand that these figures are for net income for each family type – earnings from employment, profit or loss from self-employment, state support (including benefit, tax credits and state pensions) and any other source of income. They are also after income tax, National Insurance and Council Tax payments, as well as contributions to occupational pension schemes, maintenance payments and student loan repayments. The figures are adjusted (equivalised) to take account of the size and composition of the households using the Government’s formula.
Many families on low incomes receive all or part of their income from sources other than employment, meaning that their earnings may be considerably less than these income levels.
The table below shows the net income 4 different households would have needed in 2015/16 to have had an income of 60% of the national median
Family Type Poverty line (2015/16 prices)
Couple with no children £ 248
Single with no children £ 144
Couple with two children aged 5 and 14 £ 401
Single with two children aged 5 and 14 £ 297
Source: P12 of Rowntree Report
This means that a atingle person will be classified as being in poverty if their annual income after housing costs are deducted is less than £7,000, a couple with no children, £ 13,000, a couple with two children less than£21,000 and a single parent with two children less than £15,500.
It will seen that a couple with two children needs a net income of over a £100 more than a single person to be above the poverty line , £150 more than a couple with no children and over £250 more than a single person without children. The income tax system treats all four households the same with the result households on the poverty line pay very different amounts of tax.
The Department of Work and Pensions has told us that the After Housing Cost poverty line for a single parent with one child aged 13 or under child is £ 193 per week . If the child is over 13 it is £248 per week. For a couple with one child aged 13 or under it is £297 per week If the child's over 13 it is £352 per week. In other words £13.000 pa and £ 18,400 respectively.
It is difficult to workout the pre tax income a family would need to be on the poverty line after housing costs are taken into account as these costs will differ from family to family and will vary from one part of the country to another. See article "How tax system is failing families" for estimates in two different areas.
As the authors of the Rowntree Report say the benefit and tax credit system has always had a dual role of supporting people who are out of work, and topping up the incomes of those in work who do not earn enough to meet their family’s needs. This follows from the acknowledgment that a wage that is sufficient to support a single adult may not be enough to support children or another adult, but employers cannot be expected to pay workers differently according to their home circumstances. This is undoubtedly correct but an income tax system can , and some of us think should, take account of the size and composition of the household. Its failure to do so since 2000 is surely one of the factors that has resulted in so many families with relatively good incomes nevertheless end up with a net income which is below the poverty line. It is difficult to see how this situation can change without changes to the income tax system. The introduction of independent taxation in 1990 may not have been the main cause of the rise in child poverty but the figures suggest that it is one of the factors.
The Report says that the introduction of tax credits in 1999, and notable increases in 2001, 2004, 2008 and 2011, was a major factor in the reductions in child poverty in the early 2000s.
The value of benefits and tax credits for families with children has begun to decrease compared with median income in recent years, joining a longer trend in the reducing value of benefits for those without children. The freeze on most working-age benefits (in- and out-of-work) took effect in April 2016. Inflation started to increase sharply in November 2016 and is expected to stay high. These trends are having especially strong impacts on groups for whom benefits and tax credits helped to decrease poverty sharply – lone parents, families with young children and families with three or more children.
Further reductions to family benefits and tax credits introduced in 2017 and planned for the next few years are likely to lead to significant rises in poverty among these families. Reductions in income tax, particularly through increasing the personal allowance, have benefited some working families on low incomes. However, many working parents already do not pay tax, and the gains for most other families in poverty are outweighed by cuts to in-work tax credits.
Various other changes to the benefit and tax credit system have reduced the incomes of some groups, permanently or for periods of time. The most significant of these changes are sanctions, the benefit cap and the under-occupancy penalty (or ‘bedroom tax’).
Three factors led to falling poverty: increased support through benefits and tax credits; rising employment; and containing the impact of rising rents through housing benefit and increased home ownership. All are now under question:
– The continued rise in employment is no longer reducing poverty.
– State support for low-income families through benefits and tax credits is falling in real terms.
– Rising rents, less help for low-income renters and falling home ownership leave more people struggling to meet the cost of housing.
Very little progress has been made in reducing poverty among working-age households without children. Poverty rates among the groups where the UK was successful in reducing poverty – pensioners and some types of families with children – have started to increase again.
Changes to benefits and tax credits for working-age families are reducing the incomes of many of those on low incomes. High housing costs continue to reduce the amount those in poverty have to meet other needs. Inflation is rising and is higher for those on lower incomes than for better-o groups. This squeeze on living standards is also storing up problems for the future. The success in increasing employment rates means that many of those who are now out of work are disabled or have health conditions, have young children or are caringfor disabled adults; some experience several of these circumstances. This makes it far harder for them to and sustain work, and more likely that when they do get work it is low-paid and part-time. Improving the opportunities for disabled people, carers and those working part-time to not only but earn more could greatly reduce the pressure on the benefit and tax credit system..
Solving poverty in the UK, the report says, will require urgent action in three areas:
1. Reform of Universal Credit so people keep more of what they earn and a lifting of the working-age benefit freeze so incomes keep up with prices.
2. Reduce the cost of living, particularly housing, for those on low incomes.
3. Improve education and skills, especially among children from low-income backgrounds and adults in low-paid work.
4. Work with employers and business to create more and better jobs where they are needed, and to offer more opportunities and better pay to people who currently struggle to enter and gain from work – particularly disabled people, those caring for adults or children, and part-time workers.
5. Work with communities and service providers to improve health, family relationships and social support to reduce the damage done by poverty and improve prospects.
To see the full report follow the link below
 This will change under Universal Credit.