Tax and the national minimum wage debate

Published on 20 December 2007

The TUC is pressing for an increase in the national minimum wage and also for the adult rate to be adopted from age 18 rather than 22 as now. As always, taxation should be factored into the debate; but as often happens it is not explicitly taken into account.

The current level of the national minimum wage is £5.52 per hour for someone 22 and over.

If 22 year olds work for 35 hours a week, every week, at the minimum wage of £5.52 they pay income tax of 43.5p for every hour that they work. (They will also be paying 29p in national insurance contributions.)

If that same group of 22 year olds are working after next April 5th the amount of income tax for each hour will rise to 50.7p. A 16.6% increase in tax liability for those on the national minimum wage. At least NICs go down a touch to 28p, leaving the net damage as 6p an hour extra to HMRC.

The impact upon those between 18 and 21 is even more dramatic when working the same 35 hours a week at the development rate of £4.60 per hour. The current rate of income tax per hour for this group is 23p but this will rise to 32p. A staggering increase of 38%. Again, NICs help with a small cut for the year, leaving the individual chipping in a net 7.5p extra each hour to help the Chancellor out.

Even for those working at 17 or younger where the lower rate of £3.40 per hour applies will have their weekly wage taxed an extra £1 a week. NICs do at least give roughly half of this back but their overall tax bill goes up from £202 to £233 – an increase of over 15%.

Why are we not seeing marches on Whitehall by the student population? Why are not the Unions calling for solidarity strikes or factoring tax into the national minimum wage?

Perhaps it is because the small print of tax change does not get much attention. But this is the effect of Gordon Brown’s last Budget announcement as Chancellor where the starting rate of tax of 10% was abolished from next April. Some people will get enough back from the cut in basic rate from 22% to 20% to compensate; others are helped via increases in Working Tax Credit or Age Allowances (the higher personal allowances for the 65 ). But the low paid under 25 don’t get WTC and, like early retirees, lose out.

We think it would be good if the TUC factored our national minimum wage tax index into the debate. We don’t have a view of the level of the NMW – just that the impact of tax (and NICs) needs to be taken into account.


Contact: John Andrews (Tel: 0844 579 6700 Fax 0844 579 6701)