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Summer Budget confirms importance of RTI

July 9, 2015


The Chancellor’s Emergency Summer Budget yesterday marked a significant shift away from working tax credits and introduced a mandatory National Living Wage for employers. It represented the unveiling of the Conservative Party’s General Election manifesto commitment to deliver £12bn of additional welfare savings. George Osborne put welfare reforms at the centre of his Budget confirming a fundamental move away from the semi-fixed nature of Working Tax Credits set annually, to the variable benefits of Universal Credit.

The announcements confirmed the overall trend of the welfare reforms first begun in 2010 to put work at the centre of welfare and social protection. The Budget’s emphasis on supporting claimants in work means PAYE real time information remains perhaps the single most important public policy and tax reform of recent years because employers’ and HMRC’s reporting and management of PAYE determines the level of claimants’ entitlements to DWP benefits.

Although the shift from Working Tax Credits to Universal Credit was clear it was not explicitly set out in the Chancellor’s Budget speech. However, live television coverage of the Budget showed an ecstatic Secretary of State for Work & Pensions, Mr Iain Duncan Smith punching the air in delight at the Chancellor’s announcement of the Government’s introduction of a National Living Wage and its determination to make work pay. Mr Duncan Smith is the architect of the Universal Credit reforms which ensure that benefits should only top up a claimant’s earnings from the workplace and not provide an alternative to work. Universal Credit relies on RTI earnings data reported by employers to calculate every month what additional payments need to be made to claimants. Mr Osborne praised Mr Duncan Smith in person, describing his “Herculean efforts” with welfare reform.

The Chancellor announced the National Living Wage will start from April 2016 at the hourly rate of £7.20 per hour for claimants over the age of 25 climbing to £9 an hour by 2020. The National Living Wage, which pays a premium of 50p on top of the adult rate of the national minimum wage already set to rise from October 2015 to £6.70 an hour does not replace - but is supplementary to - the National Minimum Wage which guarantees a minimum wage rate to all workers over the age of 21. The NLW effectively replaces the National Minimum Wage for those over 25.

The Chancellor declared, “That [this hourly rate] is the minimum level of pay recommended in the report to the Resolution Foundation by Sir George Bain, Chair of the Low Pay Commission.” Future increases in the rate of the NLW will be determined by The Low Pay Commission to achieve the Government's declared objective that the NLW should cover 60% of median earnings by 2020.

The Chancellor also announced that the Employment Allowance, which provides for a £2,000 rebate to all employers national Insurance payments will increase to £3,000 from 6April 2016 although eligibility will be restricted. Owner-managed businesses where the director is the sole employee will no longer be entitled to claim any Employment Allowance. The Chancellor’s stated intention for increasing the Employment Allowance was to compensate employers for the corresponding extra salary costs created by the creation of the NLW.

The Chancellor acknowledged that the NLW would have an impact on business and employment, citing the Office for Budget Responsibility publication the same day that the new national living wage will have in the OBR’s words, only a 'fractional' effect on jobs.' Mr Osborne went on: “The OBR have assessed the economic conditions of the country, and all the policies in the Budget. They say that by 2020 there will be 60,000 fewer jobs as a result of the national living wage but almost one million more in total.”

The Chancellor’s introduction of a mandatory National Living Wage, which is to be compulsory for all employers is highly significant. The NLW is directly connected to Universal Credit and the principle that state welfare protections should top up the claimant’s own earnings. By making it harder for employers to pay low wages in the knowledge they can rely on the state to subsidise low pay, the introduction of the NLW guarantees a minimum level of pay from the private sector before the state is required to contribute an earnings top up. The NLW will effectively reduce the cost of earnings top up the state must pay by ensuring employers contribute more to the value of employment.

These changes were anticipated in a speech by the Prime Minister, David Cameron of 22 June in which he spoke of the “complacency in how we approach the crucial issue of low pay” declaring “We need to move from a low wage, high tax, high welfare society to a higher wage, lower tax, lower welfare society.”

While the overall level of Universal Credit claimants currently remains low relative to the number of claimants of both Working Tax Credits and other welfare credits supported by HMRC and DWP, the Budget has made clear flexible benefits that ‘make work pay’ are to be a permanent feature of the Government’s new welfare settlement. UK employers’ reporting of PAYE in real time is central to the operation and success of benefits that are calculated in relation to employee’s net earnings. PAYE Real Time Information provides the earnings data on which the operation of the policies announced yesterday rely.

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