The Universal Benefit now puts the limit at £500 a week for a couple, or £500 a week for a single parent with one or more dependent, or £350 a week for a single person. So this encourages a practice that has been going on in Dorset and probably all over the country where a number of men share a house and each has a girlfriend or partner living nearby with dependent children.
That means for each partnership there is a joint income of £850 a week or £44,200 a year net. Seeing as the partner with dependents will receive the same benefit whether the partner is in residence or not encourages them to notionally live apart.
Ignoring that situation for the moment, a couple or a single parent will receive net from the government a maximum of £500 a week, equivalent to £26,000 a year net. This threshold was related to the average gross wage at the time of introduction and now stands at £26,500 per annum. Note that those on benefit are receiving £26,000 a year net whereas the average is £26,500 gross.
For the year 2016/17 the personal allowance is £11,000 tax-free and everything over this is taxed at a rate of 20%. Similarly the National Insurance allowance is £8,060 and everything over this is charged at 12%. In mathematical terms the tax is the (Pay gross minus £11,000) times 0.2, and the NI is (Pay gross minus £8,060) times 0.12.
So this tells us that for a working person to earn £26,000 net they have to earn quite a lot more gross. I have created a couple of equations that can calculate gross or net pay for levels of tax and national insurance allowances for 2016/17. I am willing to show the working if anyone wants to see it. Otherwise you could always ask your children or grandchildren who by the age of 16 should understand algebra.
Where Gross Pay is Pg, and Net Pay net is Pn;
Pg = (Pn – 3167.2) / 0.68,
Pn = 0.68*Pg + 3167.2.
A single employed person with a Net Pay of £26,000 needs to be earning a Gross Pay of
Pg = (26000 – 3167.2) / 0.68 = £33,577.65.
A single person earning a Gross Pay of £26,000 will have after tax and NI
Pn = 0.68*26000 + 3167.2 = £20,847.20.
A single person on Universal Benefit can receive a maximum of £18,200 per year. To receive the same net income by working that person has to be paid a Gross Wage of
Pg = (18200 – 3167.2) / 0.68 = £22,107.06. This is certainly a lot higher than a 40-hour week on minimum wage that works out at around £16,500 gross and £14,387 net.
A couple without children are worse of on Universal Benefit if they live together because they can only receive £26,000 between them. With separate residences, and alternating where they sleep and how often, they could legally each receive a maximum benefit of £18,200 per year giving them a joint income of £36,400.
In order for a breadwinner in a partnership to receive £26,000 net pay the employee actually needs to be earning £33,577.65, so unless employment at that pay is available you are better off not working!
If the couple has one or more children then either the father or mother can live in separate accommodation to receive a combined income of £850 a week or £44,200 a year. To receive a similar combined net wage of £44,200 they would need jointly to earn £60,342.35. That is way over the average gross wage for two people.
A single parent receiving maximum Universal Benefit is about £5,000 a year better off than the average wage earner. Being in work would also incur childcare costs making working totally uneconomic. A parent with dependent children and a partner living conveniently nearby are over £18,200 a year better off than a cohabiting couple.
Remember of course that the NI and Tax contributions of the workforce pay the benefits of the unemployed. It is really not fair that a couple on the average gross wage take home less than those on maximum benefit, which they are helping to fund through their tax and NI.
So now I have done the figures it is proved that with the Universal Benefit capped at £26000 a year you are still better off not working. The Conservatives have done quite a lot with Iain Duncan Smith as Work & Pensions Secretary to get the Universal Benefit brought in and the previous sky-high benefits capped to this level.
I doubt any of his successors will be able to reduce benefits further. I cannot see how they will ever achieve You are Better off In Work when the Universal Benefit makes work uneconomic. The expression there is no such thing as a free lunch is just not true.