Working poor lose out from tax and benefit changes.

It's the working poor that will take the biggest hit in government changes to tax and benefits despite increases in minimum wage.

New research published by the TUC shows that the poorest working households will lose on average £460 a year by 2020 due to government changes to tax and benefits, despite the Chancellor’s minimum wage increase. However, the richest working households will be made £670 a year better off.

The research analyses the combined impact on annual incomes in 2020 of changes due to be made to universal credit, benefits, the minimum wage and tax allowances. It also includes gains from the Chancellor’s planned increases to the minimum wage. This type of distributional analysis was included in every Budget across the last parliament, but it was excluded from the Chancellor’s July Budget. Now we understand why!

The difference between the top and the middle shows up even more starkly in the decile analysis for all households, which shows that the average annual gain for the top decile in 2020 (£780) is twenty times the average gain for the fifth decile (£40).

The TUC says that the research shows that the government’s tax and benefit policies will redistribute from the poorest to the richest. This will worsen inequality and poverty – especially in-work poverty. TUC General Secretary Frances O’Grady said:

"Even after the extra help from a larger tax allowance and a higher minimum wage, low paid families will still be made more than £8 a week worse off on average by 2020. David Cameron needs to explain to low paid families why he is cutting their income by the same amount as a whole year of school dinners, but he’s giving the richest a cash boost worth a bottle of champagne every week. Not only is this unfair, but it’s bad economics. We need more money in the pockets of low paid families so that they can get out and spend it in their local businesses."

And it's not just pay and benefits - it's prices as well. People living in poverty pay around 10% more than average for essential goods and services. Citizens Advice Scotland’s Poverty Premium report found that people with low incomes end up spending more on services such as metered utilities because they are unable to take advantage of cheaper pay in advance deals or direct debit discounts across a range of services and utilities.

The lack of internet access or a landline telephone creates extra costs. Around a fifth of all households in Scotland lack an internet connection, with the lowest income groups least likely to have one. This means low income households are paying up to £112 a year more for their energy due to a lack of ability to take advantage of switching or finding cheaper tariffs.

The report said: "When the poverty premium impacts people on very marginal incomes it can leave them destitute and in need of emergency assistance such as help from food banks. The poverty premium does not just make life more expensive for the financially less well off, it often pushes them over the edge and into crisis."

This often leads low income households to use pre-payment meters (PPM) for their energy supply. Action by energy regulator Ofgem to address price discrimination against PPM users has done little to tackle this. Also, a lot of cheaper tariffs require a bank account for direct debits and paperless billing, again needing the Internet.

These two reports show that the UK government is redistributing wealth from the working poor to the rich. More unequal countries do less well on almost every measure, so Britain is going in the wrong direction.