Wooing voters or tackling a real issue?

UK minimum wage to rise by four times rate of inflation

Employees over 25 will receive a 6.2% pay rise equating to £930 a year for full-time worker

Richard Partington Economics correspondent

 @RJPartington

Tue 31 Dec 2019 13.48 GMTFirst published on Tue 31 Dec 2019 00.01 GMT

Shares

808

 Apprentice workers will receive a 6.4% pay rise from April. Photograph: Alamy

Almost 3 million workers in Britain are to receive a pay rise of more than four times the rate of inflation from April, after the government said it would increase the official minimum wage.

In an announcement designed to woo low-paid workers in the immediate aftermath of Boris Johnson’s election victory earlier this month, the government said the national living wage for over-25s would increase from £8.21 an hour to £8.72 from the start of April.

Johnson said the increase was the “biggest ever cash boost” to the legal pay floor. “Hard work should always pay, but for too long people haven’t seen the pay rises they deserve,” he said.

Workers over the age of 25 on the legal minimum wage, rebranded as the “national living wage” four years ago, will receive an annual pay rise of 6.2% from April – more than quadruple the level of the consumer price index (CPI) gauge of inflation, which stood at 1.5% in November. The Treasury said the increase equated to an increase in gross annual earnings of around £930 for a full-time worker on the current minimum rate.

Advertisement

Pay rates will also rise above inflation across all other age groups, including by 6.5% for 21-24-year-olds to £8.20, by 4.9% to £6.45 for 18-20-year-olds, by 4.6% to £4.55 for under-18s and 6.4% to £4.15 for apprentices.

The TUC general secretary, Frances O’Grady, said the rise was long overdue. “Workers are still not getting a fair share of the wealth they create, and in-work poverty is soaring as millions of families struggle to make ends meet,” she said. “No more excuses, working families need a £10 minimum wage now, not in four years’ time.”

Details of the pay rise had been put on hold after the chancellor, Sajid Javid, scrapped the autumn budget as Johnson pushed for the snap election. Annual changes in the legal wage floor are typically announced alongside the autumn budget.

Business Today: sign up for a morning shot of financial news

 

Read more

The Conservatives faced criticism earlier this month after including a caveat in the Queen’s speech that the election promise to raise the national living wage to £10.50 by 2024 would only happen “provided economic conditions allow”.

Javid had said at the Tory party conference in September that his party would set a five-year target to raise the low-pay floor from 60% of median earnings in Britain to two-thirds. He also said he would lower the age threshold for the national living wage from 25 to 21.

Labour had promised to introduce a real living wage of at least £10 an hour for all workers aged 16 and over immediately, in a policy designed to show it would move faster to support households than the Tories.

Average pay packets across Britain remain lower than before the financial crisis, once inflation is taken into account, after one of the worst decades for pay growth since the end of the Napoleonic wars 200 years ago. Annual pay growth has accelerated this year, repairing some of the damage by rising at the fastest rate in 11 years.

Unemployment has dropped to its lowest level since the mid 1970s and inflation has remained relatively stable in the past year, hovering below the Bank of England’s target rate of 2%, helping hard-pressed families to repair their finances.

Pay growth has started to fall again in recent months, however, against a backdrop of heightened uncertainty over Brexit and a slowdown in the world economy.

Campaigners say work no longer guarantees a way out of poverty, with figures suggesting that about 14.3 million people are struggling to make ends meet, including about 9 million people who live in families where at least one adult is working.

The latest government announcement does not meet the level outlined by the Living Wage Foundation charity, which sets a voluntary pay floor used by about 6,000 companies calculated to reflect what people need to live on.

The Living Wage Foundation sets its “real living wage” at £9.30 an hour and £10.75 an hour in London. Firms including the insurer Aviva, the Nationwide building society and football clubs such as Crystal Palace are among employers committed to paying the real living wage to more than 210,000 workers.

The business secretary, Andrea Leadsom, said the government would set out a future policy framework in the spring for raising the legal minimum pay level over the next five years.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Business leaders, however, said the government risked damaging companies at a time of heightened economic uncertainty.

Hannah Essex, co-executive director of the British Chambers of Commerce, which represents 75,000 businesses, said the move to raise the wage floor by more than double the rate of inflation in 2020 would “pile further pressure on cash flow and eat into training and investment budgets” at companies across the country.

“For this policy to be sustainable, government must offset these costs by reducing others and impose a moratorium on any further upfront costs for business,” she said, adding that many firms were struggling with rising costs.

We cover this in Unemployment...

But it also sits well in the Tax topic just finished. I'm think the book would be a good read...

Nations will soon find taxation
more taxing

The world of work is changing as the gig economy – and the self-employed themselves – go global. That will leave a big hole in countries’ coffers, says Dominic Frisby

Governments around the world have got a big problem on their hands. I wonder if many of them even realise it. What has been their biggest source of revenue for years is going to get that much harder to collect, just as their needs, whether to cover spending programmes or service debts, grows more pressing.

Across the developed world, 50% of government revenue comes from income taxes. The relationship between employer and employee has proved easy to tax: the levy is deducted at source. But that relationship is changing. The nature of employment  is changing.

In the UK, the number of people working for themselves has grown by 50% since 2000, compared with a 6% rise in employees over the same period. London’s gig economy has grown by 73% since 2010. But this is a global phenomenon. In Europe, Australia and across Asia there are similar levels of growth.  By 2030, says Ernst & Young, a full 50% of full-time US workers will be contingent.

GET READY TO GIG 

In 1990, the three biggest companies in Silicon Valley employed over a million people. Today, the three biggest – Facebook, Google and Apple – have a combined market cap over 60 times higher, yet have a quarter as many employees. The largest taxi company in the world, Uber, has just 16,000 employees. The largest accommodation provider, Airbnb, has 9,053. Yet how many giggers find work as a result of Silicon Valley giants?

“IN THE US, 69% OF FREELANCERS DIDN’T REALISE THEY HAD TO FILE A QUARTERLY TAX RETURN”

Some have criticised the gig economy, saying it exploits people and does not give them the protection they deserve, but surveys show much higher satisfaction levels among the self-employed than among the employed. The large majority of giggers want to stay in contingent work to progress their careers. As we live longer lives many more of us will pursue gig work in what was previously our retirement. Many will embrace multiple income streams as machines – whether AI, robot or algorithm – replace blue- and white-collar workers. Employers like it too. Freelancers dramatically reduce the costs and other burdens of employment.

The tax implications are considerable. First, there is the loss to government of employment and payroll taxes, but far bigger is the problem that income taxes will get harder to collect. At present there are few systems in place to deduct tax at source from contingent workers. There is vast scope for non-compliance, whether accidental or deliberate.  The Inland Revenue Service already attributes 44% of its $450bn annual tax gap to the improper compliance of individual business income. In the US, 69% of freelancers surveyed did not even know they had to file quarterly returns.

CHASING THE SELF-EMPLOYED

A review of employment practices commissioned by former prime minister Theresa May found that self-employed workers typically pay £2,000 a year less in tax than employees in equivalent jobs. Given that someone on the UK average salary of £27,500 would pay about £5,300 in income tax and national insurance, this is no small loss.

The response will be to raise taxes for the self-employed and to re-regulate those who employ them. Already UK freelancers who hire themselves out through limited companies have had their dividend taxes increased, while flat VAT rates for the self-employed have also been altered. Meanwhile, employers such as Uber and Hermes have come under pressure through the courts by those seeking to redefine full-time employment and gig work. Tax authorities will, I suspect, try to find ways to deduct presumed income at source from the platforms providing the work and then leave it to the individual to claim back the difference – much as withholding currently works in the US. But none of this is as clean and simple as old-school income tax.

Tax systems, built around a physical economy, have struggled with the intangible, globalised economy. Look at the problems they have with the likes of Amazon, Facebook and Apple. What happens when workers themselves globalise? One estimate is that by 2035, a billion of the world’s six billion people will be “borderless”, working via the internet in multiple jurisdictions and never spending more than 183 days in any given one. Many will use borderless crypto money, often the most efficient system of payment across the internet, which itself is hard to tax and regulate. 

The nations that adapt soonest to the realities of the new, digital, globalised economy around us will be those that thrive best. I don’t see a single British politician talking about, let alone preparing for, any of this.

Daylight Robbery: How Tax Shaped Our Past And Will Change Our Future by Dominic Frisby, Penguin Business, £20. Audiobook on Audible.co.uk. Signed copies are available at dominicfrisby.com