Couple Penalty 2008
This paper measures the disposable incomes of couples with children on low to modest incomes in 2008/09 living together and living apart. It updates previously published figures for 2006/07 and 2007/08.
This paper was the third annual review of the disposable incomes, after housing costs, of 98 families on low and modest incomes.
Most couples lose significant amounts of tax credits if they live together. The review takes account of not only tax and benefits but also the additional housing costs that result from a decision to live apart. It updates a similar analysis of disposable incomes in 2006/07 and 2007/08. As in the previous paper, the incomes of couples are compared living together and living apart. Separate figures are shown where maintenance payments are made by the non-resident parent (NRP).
When housing costs are taken into account, the financial disadvantage of living together is less, but for 75 per cent of the families modelled, the disadvantage remains. The biggest losers from living together are one-earner couples where the parent-with-care (PWC) would receive income support when living alone. Although in general two-earner couples do not gain significantly by splitting up there appears to be a significant advantage for higher-income couples.
The review suggests that in 2008/09 there has been an increase in the number of couples who would have been better off living apart. This was largely due to changes in the benefit rules that apply to maintenance payments. In 2008/09, where maintenance payments were made, 74 couples would have been, on average, £58 better off in 2008/09, compared with £48 per week in the previous year.
If maintenance payments are disregarded, the number of couples worse off living apart remained almost unchanged. 76 couples were worse off living apart in 2008/09 compared with 75 in 2007/08. For these couples the average couple penalty remained unchanged at £68 per week.
The average disposable income of these families after tax and rent is taken into account was £302 per week. The couple penalty represented 22 per cent of disposable family income. In other words, the couples affected would have been 20 per cent better off staying apart or separating, even when housing costs are fully taken into account. The figures do not take account of any saving in utility and food costs that result from families living together, but it does not seem likely that these savings would amount to as much as £68 per week for the average family.
Although, disregarding the possibility of maintenance payments, the number of families affected by the couple penalty has remained much the same and the average penalty unchanged, these findings mask some changes. For couples on lower incomes the penalty has decreased, whereas for couples on higher incomes the penalty has increased. This appears to be the result of the changes in the tax and tax credit system that took effect in 2008/09.
For single-earner couples with the lowest surveyed income (in 2008/09, £260 per week), the couple penalty was £40 per week compared with £44 per week in 2007/08. For couples with the second lowest surveyed income (in 2008/09, £390 per week), the penalty was £82 per week compared with £83 per week in 2007/08. For couples with the highest surveyed income (in 2008/09 £520 per week), the average penalty increased from £138 per week to £142 per week.
For two-earner couples, the couple penalty is not significant where the combined income is less than £400 per week, but becomes significant above £550 per week.
For couples on income support, there is a £26 per week advantage in living apart.
Finally, the paper looks briefly at the arguments both for reducing the couple penalty and for retaining it as an accepted part of the tax and benefit system.
For further reading see IFS report in 2010: