A Look At The Living Wage

One of the current areas of political controversy is that of the "living wage", with its supporters calling for it to be set at £8.55 per hour in Greater London and £7.45 per hour elsewhere. It is interesting that the call is for a higher level to reflect a higher cost of living in Greater London - at the moment the whole welfare system works on uniformity, e.g. Jobseekers' Allowance is the same whether you live in Cardiff or Cambridge. With Labour making moves to endorse it, it would be interesting to see whether the logical conclusion - variable benefit rates - would follow.

If you are unemployed, then there are a couple of basic state benefits. The first of these is Jobseeker's Allowance, which can be either Contribution-based or Income-based. At the moment I get the Contribution-based Jobseeker's Allowance, as I have paid enough Class I National Insurance contributions. There are two things to note, slightly interconnected:

• Contribution-based Jobseeker's Allowance simply depends upon you having paid Class I National Insurance contributions for enough weeks over the past 2 years - it doesn't matter how much you have paid, only that you have paid
• The amount you get for both types of Jobseeker's Allowance is the same

Hence the situation that it doesn't really matter how much Class I National Insurance contributions you have paid, or even whether you have paid any at all. There have been no moves towards, for example, ensuring how much you receive depends on how much you have paid in.

There is also Income Support. Now, this is actually something different, not that everyone grasps that. When I studied for my Financial Planning Certificate, as our trainer went through the state benefits, he would refer to Contribution-based Jobseeker's Allowance simply as "Jobseeker's Allowance" and Income-based Jobseeker's Allowance incorrectly as "Income Support".

You can claim these if you are employed - as long as you work less than 16 hours per week. Basically, if you earn over £5 per week, then your benefit is reduced by whatever you earn above that £5. So, if you earned £30 per week (and you would have to be working very part-time for that), then your benefit is reduced by £25 per week. In addition, if you have savings of more than £6,000, then it is assumed that every £250 above that would generate income at £1 per week, and this would be counted against you.

When the previous Labour Government came to power in May 1997, it did make reforms of the welfare system. One thing is that people are more comfortable with paying top-up benefits to people who are working than paying benefits to people who are not. And so one innovation was that of tax credits for people on roughly below-average incomes, with Her Majesty's Revenue & Customs producing a short guide to Child Tax Credit and Working Tax Credit as well as a slightly more detailed guide.

The other innovation was the National Minimum Wage, which was introduced by the National Minimum Wage Act 1998, which empowers the "Secretary of State" (now meaning the Business & Innovation Secretary - at the time it meant the Trade & Industry Secretary - to set a national minimum wage after consultation with the Low Pay Commission. The current amount is £6.31 per hour for people over 21.

There's one thing I'd like to look at here, which is how much take-home pay would be on the living wage. Assume a 37.5 hour working week, then it is £279.38 per week. This is £14,527.76 per year.

If you are on the national minimum wage, then these are £236.63 per week and £12,304.76 per year.

There are two basic deductions that are made from a wage. The first is Income Tax and most people have a Personal Allowance of £9,440 per year, and then income above that is taxed at 20%. As we are talking about low incomes here, we need not look at higher rates.

On the national minimum wage, this is 20% of £2,864.76, which is £572.95 per year. On the living wage, this is 20% of £5,087.76, which is £1,017.55 per year.

The other is National Insurance, and what we are interested in here are the Class I contributions, which this table covers. The first important limit is the Lower Earnings Limit of £102.00 per week (or £5,304.00 per year), and the second important limit is the Primary Threshhold of £139.00 per week (or £7,228.00 per year). Between these, you pay National Insurance at 0%.

That might seem odd - why not say that you don't pay it? Well, you don't pay National Insurance on earnings below the Lower Earnings Limit. Above it you do. If you recall, Contribution-based Jobseeker's Allowance is dependant on you paying Class I National Insurance contributions for 2 years - and as far as the system is concerned, if you have paid at 0% then you have still paid. Basic State Pension also depends on paying Class I National Insurance contributions - this time for 30 years.

Above this Primary Threshhold you pay Class I National Insurance at 12% (again, as we are dealing with low incomes, we don't look at higher rates).

On the national minimum wage, this is 12% of £5,076.76, which is £609.21 per year. On the living wage, this is 12% of £7,299.76, which is £875.97 per year.

So, on the national minimum wage, the take-home pay is £12,304.76 - £572.95 - £609.21 = £11,122.60 per year, which is £926.88 per month or £213.90 per week.

On the living wage, the take-home pay is £14,527.76 - £1,017.55 - £875.97 = £12,634.24 per year, which is £1,052.85 per month or £242.97 per week.

Is there an alternative to the living wage? The current Conservative/Liberal Democrat Government has begun a process of increasing the Personal Allowance. What if we took it and the Primary Threshhold to the national minimum wage level, i.e. set them to be equal to what someone working 37.5 hours at the national minimum wage would get.

That is only £329.48 per year less than what someone on the living wage would take home on the current Income Tax and Class I National Insurance contributions rules.

In fact, if we increase the national minimum wage by just 17p per hour (just a 2.7% increase), and raise the Personal Allowance and Primary Threshhold to be equal to what someone working 37.5 hours at this amount would earn, then such a person would have a take-home pay of £12,636.00 per year, equal to £1,053.00 per month or £243.00 per week.