The crisis of the Covid-19 pandemic and war in Europe in the early 2020s brutally exposed the fragility of the UK social security system. But this vulnerability has been brewing for a long time. A decade of cuts, freezes, caps and haphazard migration between systems has left the UK with one of the weakest safety nets in the world’s developed nations and in its history. Millions of families live in avoidable deprivation and hardship, rendering the country inexcusable in the face of economic shocks. The country has been forced to fundamentally reshape social security from the ground up, not only once through the creation of leave and income protection programs, but also cost of living support and energy price guarantees, all of which have brought about impressive results for the government and society. the cost of.
Britain is now on the cusp of the worst living standards crisis on record. The Office for Budget Responsibility (OBR) has forecast an impressive 7% decline in per capita disposable income over the next two years. But what it means for families, especially low-income families, is an even more harrowing day-to-day experience.According to the Joseph Rowntree Foundation (JRF), 43% of households will not be able to afford a decent standard of living by December 2024 of‘“Minimum Income Standard” (MIS), up from 31% at the last general election. This includes 88% of single parents and 50% of working families with children. On average, those below the threshold of a decent standard of living will be short-lived each year £10,000.
Historically, public support for income protection has come and gone, often reflecting views of the broader economic cycle. But the UK is now seeing the longest period of public support for the role of social security since at least the 1980s. The economic pain is real, the trade-offs are real, and they cannot go away on their own. But the design of social security can have a huge impact on how this pain is felt, by whom, and for how long. Rarely has the need for system-wide change been so great, the opportunity so great, or the cost of inaction so great.
This report sets out the NEF’s recommendations for a new regime of working-age income protection for the next decade and beyond. It brings together and builds on our published work since 2020, proposing the first step towards a New National Living Income (NLI) replacing the existing Universal Credit (UC) system. We have developed and developed a detailed reform agenda for the next Parliament, built around four key principles:
Income protection based on a minimum standard of decent living. To go against this principle, the NLI will provide new minimum income guarantees as needed, including setting a new standard payment at the end of the first parliament at 50% of MIS after deduction of Housing and Child Care Costs (AHCC), valued per person £460. £770 per month for single adults and £770 per month for working age couples in 2021/22, rises to 75% over MIS (AHCC); pays up to 100% for children, disabled or unable to find work MIS (AHCC); and removal of caps, restrictions and sanctions. In contrast, for singles over the age of 25 at UC, the percentage of minimum MIS (AHCC) is only 35%.
Expand universal provision to create a real minimum income guarantee. This will be achieved through two key features. First, a new state allowance is paid to almost all individuals in the UK, not just those on means-tested benefits. This guaranteed element will be factored into the calculations to bring households to the minimum level of MIS (AHCC) and will re-use part of the tax-free allowance from income tax and National Insurance contributions. Second, a new automatic enrollment system helps ensure that the Social Security system works more like the inverse of the tax system: additional support is automatically provided when incomes fall, similar to how more taxes are automatically paid when incomes rise.
Strengthen financial work incentives. The NLI will instill a new principle that no one will have to pay any taxes or withdraw any benefits until the income is equal to 100% of the single adult’s MIS (AHCC). This will be achieved by first ensuring that the guaranteed payment of 50% of MIS (AHCC) is neither taxable nor counted towards work allowance (the minimum amount someone can receive before withdrawing benefits). Apart from this, work allowance for single adults will be set at 50% of MIS (AHCC) and extended to every adult on NLI, while personal allowance for income tax and National Insurance will also be set at MIS (AHCC) 50%. Single Adult MIS (AHCC). NLI also has a lower regressive tax rate on withdrawn benefits than UC, set at 50% instead of 55%, reducing the maximum effective marginal tax rate for low-income earners.
Fully fund the system through a progressive tax system. The NLI will be fully funded by closing the gap between effective taxation of employment income and wealth income, and ensuring higher incomes pay the same National Insurance marginal rate as everyone else. This includes extending National Insurance to investment income, making capital gains and dividends taxed at the same rate as income tax, and removing the income cap on National Insurance contributions.
The NLI will revolutionize taxation and social security in the UK, with huge benefits for low and middle income families. Everyone outside the richest third would be better off overall, with average disposable income increases of more than 50% for the poorest households (£500 per month) and 9% for middle-income households ( £200 per month). Even with the standard allowance set at 50% of the MIS (AHCC), the NLI has a huge impact on the risk of deprivation. Among low-income households, the proportion below 75% of the MIS (AHCC) will drop from 53% to 19%, and the number at risk of deprivation will drop to almost zero once minimum income security rises to 75% MIS.
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