research - Vote Leave
Osborne’s living wage will undercut Cameron’s plans to restrict EU migrant benefits The Government has committed to reduce the amount of in-work benefits for EU nationals during their first four years in the UK. If it succeeds in negotiating that and implements it, the Government argues the UK would become a less attractive destination for those looking to improve their living standards. This policy is intended to reduce inward migration by reducing the ‘pull factors’ that encourage EU migrants to move to the UK. Owing to a lack of joined-up thinking in Government the plan will be completely undercut by George Osborne’s new ‘living wage’. The UK will therefore remain an extremely attractive destination for EU migrants, regardless of whether the Government succeeds in its plan to limit the claims made by EU migrants. Worse still, if the Government is not successful in limiting benefit claims by EU migrants the pull factors will become stronger than they are now. The Cabinet Secretary has warned that the proposed changes to migrant benefits are likely to be illegal under EU law. This means they are very unlikely to survive a challenge in the European Court of Justice. That means that the number of EU migrants to the UK is likely to rise rather than fall owing to the policies of David Cameron and George Osborne’s government. * The Prime Minister’s promise On 28 November 2014 David Cameron announced that ‘the British people need to know that changes to welfare to cut EU migration … will be an absolute requirement in the negotiation 1 that I’m going to undertake’. In his speech that day, the Prime Minister clarified his policy: ‘In future, if you are from the European Union and you come to Britain looking for a job, we will not pay you unemployment benefit, point 1. If you stay for longer than 6 months without a job, you will go home, point 2. If you get a job and you stay here in Britain, you will not get in work benefits, housing benefit, Universal Credit, all the other benefits. You will not get those until you’ve paid into the system for four years, point 3. Point 4, if you come here and you work and, even after the 4 years when you get those in work benefits, if your children and your family is at home in your home country while you’re working here, the child benefit will not go 2 from Britain to that country’. In his letter to Donald Tusk on 10 November 2015, he made clear: ‘we have proposed that people coming to Britain from the EU must live here and contribute for four years before they qualify for in-work benefits or social housing’. This is therefore clearly a key part of the
David Cameron, ‘JCB Staffordshire: Prime Minister’s speech’, (28 November 2014), . 2 David Cameron, ‘JCB Staffordshire: Prime Minister’s speech’, (28 November 2014) . 1
Government’s renegotiation of the UK’s membership of the EU. Analysis suggests that, if the Government is able to implement it, cutting benefits would make the UK much less attractive.3 However, the Government’s separate plan to introduce a living wage for over-25s will significantly reduce the impact of this policy by substantially increasing wages for migrant workers - offsetting the impact of the benefits restriction. There have also been warnings that applying such a test to migrants alone would breach EU law. The Cabinet Secretary, Jeremy Heywood, has been reported as warning ministers that the change could be illegal.4 According to media reports, the Government is now considering extending the rule to all UK benefit applicants from the age of 18. This would mean that Britons, even if they had always 5 lived in the UK would, from their 18th birthday, be ineligible for benefits for four years. This paper looks at four scenarios: the status quo (neither the benefits restrictions nor the living wage); the situation in 2020 imagining the Government has been able to introduce the benefits restriction but has not introduced the living wage; the situation in 2020 assuming the Government does stop benefits for EU migrants and introduces the living wage; and the situation in 2020 assuming the Government fails to stop benefits for EU migrants and still introduces the living wage. Our research finds that, even with a four-year ban on in-work benefits, thanks to the living wage, the UK will remain an attractive destination for EU migrants.
Methodology This paper builds on the methodology used by the 2014 Open Europe paper ‘Free Movement: keep it fair to keep it free’ to establish what the impact of the Government’s living wage reforms will be. This work was cited by the Prime Minister as evidence for the need for his EU reforms, claiming in November 2014 that ‘if you reduce the massive cash incentive for people to come from Europe to our country, they are less likely to come. I think that’s absolutely clear 6 from all the work done by the analysts and the experts and Open Europe and everybody else’. There are a number of differences between the results in this paper and the Open Europe study. Unlike Open Europe, which focused on the situation in 2014, this paper attempts to forecast the impact both today and five years into the future.7 It also uses the Universal Credit calculator to calculate UK benefits. (In-work benefits are a subset of UK benefits generally. They include disbursements such as tax credits. These should be distinguished from special non-contributory cash benefits like Jobseeker’s Allowance and Employment & Support Allowance. The Government is currently overhauling the benefits system to introduce the
3
There are questions about how far cutting in-work benefits will make the UK less attractive, as relatively few EU migrants claim in-work benefits, see 4 BBC News, ‘Cameron is warned key EU reform objective may be illegal’ (04/11/2015) 5 ‘EU migrant benefit plan 'could hit thousands of young Britons'’, (11 August 2015) . 6 David Cameron, ‘JCB Staffordshire: Prime Minister’s speech’, (28 November 2014) . 7 Assuming constant exchange rates.
2
8
Universal Credit. ) As a result of these changing circumstances and different sources, this paper reaches different numbers to the Open Europe report. In order to gauge how attractive the UK’s benefit system is, a comparison is made of four countries: the UK, Spain, Poland and Bulgaria. In each instance, the impact of moving to the UK from another EU country for a relevant person on the minimum wage with no children and a relevant person on the minimum wage with two children is calculated. As far as possible, tax calculators produced by PricewaterhouseCoopers (PwC) were used to help accurately calculate the final disposable income. Modelling the impacts At the moment, the UK is a very attractive destination for EU migrants: Weekly take-home income: single earner, minimum wage, no dependent children (2015) – PPP conversions UK Spain Poland Bulgaria £227.50 £178.41 £153.31 £77.87 Salary -£28.59 -£11.33 -£52.08 -£20.47 Total deductions £198.91 £167.08 £101.24 £57.40 Income post deductions £74.72 £48.19 £0.00 £0.00 Benefits £273.63 £215.26 £101.24 £57.40 Total +27%
Effect of moving to UK
+170%
+377%
Weekly take-home income: single earner, minimum wage, two dependent children (2015) – PPP conversions UK Spain Poland Bulgaria £227.50 £178.41 £153.31 £77.87 Salary -£28.59 -£11.33 -£52.08 -£20.47 Total deductions £198.91 £167.08 £101.24 £57.40 Income post deductions £234.17 £59.97 £65.36 £19.90 Benefits £433.08 £227.05 £166.60 £77.30 Total +91%
Effect of moving to UK
8
+160%
+460%
‘Q&A: Universal credit and the benefits overhaul’, BBC, (15 February 2015) .
3
It is possible to look at what the impact of the Government’s proposed reforms for restricting in-work benefits for four years may be. This can be done by adjusting the above figures for inflation and setting the amount of in-work benefits to ‘0’. This shows that the UK becomes far less attractive (N.B. this is based on adapting the old minimum wage levels, as they were set in November 2014, for inflation). These figures assume a consistent exchange rate.
Weekly take-home income: single earner, minimum wage, no dependent children (2020) – PPP conversions, adjusting current minimum wage for inflation UK Spain Poland Bulgaria £232.14 £181.14 £157.24 £79.54 Salary -£24.37 -£11.50 -£53.41 -£20.91 Total deductions £207.78 £169.63 £103.83 £58.63 Income post deductions £0 £48.92 £0 £0 Benefits £207.78 £218.56 £103.83 £58.63 Total -5%
Effect of moving to UK
+100%
+254%
Weekly take-home income: single earner, minimum wage, two dependent children (2020) – PPP conversions, adjusting current minimum wage for inflation UK Spain Poland Bulgaria £232.14 £181.14 £157.24 £79.54 Salary -£24.37 -£11.50 -£53.41 -£20.91 Total deductions £207.78 £169.63 £103.83 £58.63 Income post deductions £0 £60.89 £67.04 £20.32 Benefits £207.78 £230.53 £170.87 £78.95 Total -10%
Effect of moving to UK
4
+22%
+163%
This situation changes if, as planned, the living wage is introduced. Adjusting salary values for both announced policy changes and for inflation (again, assuming a consistent exchange rate), shows that while the attractiveness of the UK would still slightly diminish, it would remain a very appealing destination for EU migrants. The impact of the reforms on single earners is nearly completely negated when compared to the current situation, and the impact on those with two children is substantially mitigated.
Weekly take-home income: single earner, minimum wage, no dependent children – w ith EU migrant benefit reforms (2020) – PPP conversions, living wage applied UK Spain Poland Bulgaria £315.00 £181.14 £157.24 £79.54 Salary -£49.23 -£11.50 -£53.41 -£20.91 Total deductions £265.77 £169.63 £103.83 £58.63 Income post deductions £0.00 £48.92 £0 £0 Benefits £265.77 £218.56 £103.83 £58.63 Total +22%
Effect of moving to UK
+156%
+353%
Weekly take-home income: single earner, minimum wage, two dependent children - with EU migrant benefit reforms (2020) – PPP conversions, living wage applied UK Spain Poland Bulgaria £315.00 £181.14 £157.24 £79.54 Salary -£49.23 -£11.50 -£53.41 -£20.91 Total deductions £265.77 £169.63 £103.83 £58.63 Income post deductions £0 £60.89 £67.04 £20.32 Benefits £265.77 £230.53 £170.87 £78.95 Total +15%
Effect of moving to UK
5
+56%
+237%
Finally, we can assess the impact of the living wage proposals were the Government to fail to introduce the four-year residence test. This shows, unsurprisingly, that the UK would be far more attractive to EU migrants than it is at the moment.
Weekly take-home income: single earner, minimum wage, no dependent children - without EU migrant benefit reforms (2020) – PPP conversion UK Spain Poland Bulgaria £315.00 £181.14 £157.24 £79.54 Salary -£49.23 -£11.50 -£53.41 -£20.91 Total deductions £265.77 £169.63 £103.83 £58.63 Income post deductions £76.24 £48.92 £0 £0 Benefits £342.01 £218.56 £103.83 £58.63 Total +56%
Effect of moving to UK
+229%
+483%
Weekly take-home income: single earner, minimum wage, two dependent children - without EU migrant benefit reforms (2020) – PPP conversion UK Salary Total deductions Income post deductions Benefits Total
£315.00
Spain £181.14
Poland £157.24
Bulgaria £79.54
-£49.23
-£11.50
-£53.41
-£20.91
£265.77
£169.63
£103.83
£58.63
£238.95
£60.89
£67.04
£20.32
£504.72
£230.53
£170.87
£78.95
+119%
+195%
+539%
Effect of moving to UK
6
Our working for the data in each of the tables is provided below:
UK - 2015 Income and deductions The UK’s current minimum wage is £6.50 an hour. This translates to £227.50 per week (assuming a 35 hour working week). The UK’s current income tax per week is calculated as follows. There is a £10,600 tax free 9 allowance per year. With 20% income tax on the minimum wage, this works out as £4.73 per week . National Insurance contributions (which are 12% for earnings over £155 per week) work out as £8.70 per week . 10
The average Council Tax payment per dwelling in 2014/15 was £1,051. This translates to £20.21 per week – or £15.16 per week after factoring in the single person discount of 25%. Taken together, this means that deductions amount to £28.59 per week on the minimum wage. Total benefits To calculate benefits, the relevant person’s details were entered into a Universal Credit 11 calculator. A healthy, single, childless person who is 28 and lives in a one bedroom council or housing association property, working full time on minimum wage, is entitled to £74.72 per 12 week on Universal Credit. By contrast, a healthy, single person with two four-year-old children, who is 28 and lives in a two bedroom council or housing association property, working full-time on minimum wage, is entitled to total benefits of £234.17 per week from both Universal Credit and Child Benefit (Child Benefit is paid at a flat rate of £20.70 per week for the first child and £13.70 per week for the second. This amounts to £34.40 per week). UK - 2020 Income and deductions The living wage in 2020 will be £9 per hour, the equivalent of £315 per week (again, assuming a 35 hour week). (Without living wage, the old minimum wage adjusted for inflation would have been £232.14 per week.)
HM Treasury, ‘Tax and tax credit rates and thresholds for 2015-16’, (Accessed: 5 October 2015) . 10 DCLG, ‘Council tax levels set by local authorities in England 2015-16 (Revised) ‘, (15 July 2015) Please note this refers to the average tax incidence for all types of dwelling. 11 Universal Credit Calculator . 12 The location was set to be near Guildford as a generic placeholder example of a non-London UK city. 9
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13
By 2020, the Government intends there to be a £12,500 tax free allowance. We assume that income tax will remain at 20% as the Government is committed to not increasing income tax 14 rates. This amounts to income tax of £14.92 per week . Assuming that National Insurance in 15 2020 will start at £158, deductions will be £18.84 per week . To calculate the average Council Tax payment, we can use IMF inflation forecasts to uprate the current annual figure of £1,051 to £1,072. This amounts to £20.62 per week or £15.47 per week after factoring in the 25% single person discount. Without the living wage, the old deductions, adjusted for inflation, would have been £ 24.37 per week. Total benefits To calculate benefits per week, the 2015 value is adjusted for inflation. This means that for people without dependent children, total benefits are £76.24 . For someone with children, the total 2020 benefits are £238.95 . Spain – 2015 16
These calculations were informed by the PwC calculator. Income and deductions
The Spanish statutory minimum wage in early 2015 was €756.70 per month, the equivalent of €170.87 per week or £178.41 per week . Spain does not require people on minimum wage to pay income tax, but they are required to pay 4.7% from the contribution base towards ‘common contingencies’, 1.55% towards ‘unemployment’ and 0.1% towards occupational training. These deductions amount to €10.85 per week or £11.33 per week . Someone with two children can claim €11.29 per week from the state for child support, or £11.79 per week . A person, regardless of their number of children, can claim up to €46.15 per week (£48.19 per week) in housing benefit. Spain – 2020 By adjusting all figures for inflation, we can work out that the projected values for income and benefits in Spain will be as follows: Income and deductions
HM Treasury, 'Tax and tax credit rates and thresholds for 2015-16' ; Finance Bill 2015, clause 1. 14 Conservatives, 'The Conservative Party Manifesto 2015', . 15 Based on taking the 2015 figure of £155 and uprating using IMF inflation forecasts. IMF figures can be found at . 16 PwC, 'Spain - Individual - Sample personal income tax calculation', . 13
8
The Spanish statutory minimum wage can be estimated as €768.28 per month, the equivalent of €173.48 per week or £181.14 per week . As previously stated, Spain does not require people on minimum wage to pay income tax, but they are required to pay 4.7% from the contribution base towards ‘common contingencies’, 1.55% towards ‘unemployment’ and 0.1% towards occupational training. After adjusting current figures for inflation, these deductions amount to €11.02 per week or £ 11.50 per week . Someone with two children can hope to claim €11.46 per week from the state for child support, or £11.97 per week . A person, regardless of their number of children, should be able to claim up to €46.86 per week ( £48.92 per week) in housing benefit. Poland – 2015
17 18
Payments can be calculated by using the PwC sample pension income tax calculator. The Polish minimum wage per month is 1,750zł , the equivalent of 395.16złper week, or £153.31 per week . Poland requires employees to pay into a number of insurance funds. The rates can be confusing, as different percentages have to be contributed by employees and the rest by the employer. A review of the system shows that an employee is expected to pay the following into the various funds: Emerytalna (Pension): 9.76%, Chorobowa (Illness fund): 2.45%, Rentowa (Disability): 1.5%, fundusz pracy (Employment fund): 2.45% and fundusz gwarantowanych swiadczeńpracowniczych (Employee benefit funds): 0.1%. For someone on the minimum wage, these deductions amount to 64.25złor £ 24.93 per week . After this, income tax is calculated. Poland has an annual tax free allowance of 3,091zł. This means that, with an effective tax rate of 10.25%, income tax is 34.41złor £13.35 per week . Following this, health insurance at 9% of remaining income is deducted – this amounts to 35.56zł , or £13.80 per week . Therefore, total deductions are £52.08 per week . The amount of benefits for the first and second child is 1112.04złper child (relief for the third child is 2000.04zł , and all others 2700zł ). This means that someone with two dependent children, who is also entitled to child benefit of 48.92złand additional payments of 76.77zł per week can hope to claim about 168.46zł , or £ 65.36 per week
During the production of this report, questions were raised about the methodology used by Open Europe, in particular over their adjustment for PPP. Multiple sources were used by Open Europe to calculate PPP exchange rates, instead of one constant source. This appears to have had the effect of artificially bolstering the conversion rates for Polish salaries, by around 13%. This paper consistently uses World Bank conversion tables. 18 PwC, 'Poland - Individual - Sample personal income tax calculation', . 17
9
Poland - 2020 Again, new values can be calculated by adjusting all figures for inflation and by using the PwC 19 sample pension income tax calculator. The Polish minimum wage per month can be put at 1,794.87zł, the equivalent of 405.29złper week, or £ 157.24 per week . Adjusting insurance contributions for inflation shows that someone on the minimum wage will be expected to pay 65.90złor £25.57 per week . Poland’s annual tax free allowance can be estimated as 3,170.25zł . This means that, with an effective tax rate of 10.25%, income tax amounts to 35.29złor £13.69 per week . Following this, health insurance at 9% of remaining income is deducted – amounting to 36.48zł , or £14.15 per week. Therefore total deductions are £53.41per week . Someone with two dependent children can hope to claim £67.04 per week in child benefits. Bulgaria - 2015 The Bulgarian minimum wage is 340лв per month, or 76.77лв per week – the equivalent of £77.87 per week . As previously explained, 10% flat tax has to be paid on this, amounting to £7.79 per week for someone on the minimum wage. Following this, payment has to be made into retirement pension insurance (5.7%), the additional compulsory pension insurance (2.2%), sickness and maternity insurance (1.4%), accident insurance (0.4%); the employment fund (0.4%) and the national health fund (8%). This amounts to total deductions of 20.18лв or £20.47 per week. In addition, people in Bulgaria are entitled to monthly child allowances. They receive 50лв for the first child and 35лв for the second. Someone with two dependent children will thus receive 19.62лв, or £19.90 per week.20 Bulgaria - 2020 The Bulgarian minimum wage, adjusted for inflation, can be estimated as 347.29лв per month, or 78.42лв per week. This translates to £ 79.54 per week . A 10% flat tax has to be paid on this wage, amounting to £7.95 per week for someone on the minimum wage. Following this, payment has to be made into retirement pension insurance (5.7%), the additional compulsory pension insurance (2.2%), sickness and maternity insurance (1.4%), accident insurance (0.4%), the employment fund (0.4%) and the national health fund (8%). This amounts to total deductions of 20.62лв or £20.91 per week . Someone with two dependent children will receive 20.04лв, or £20.32 per week .
PwC, 'Poland - Individual - Sample personal income tax calculation', . 20 These figures are different to those produced by Open Europe. Open Europe appear to have treated the 85лв figure as an annual rather than monthly figure. 19
10
David Cameron, ‘JCB Staffordshire: Prime Minister’s speech’, (28 November 2014), . 2 David Cameron, ‘JCB Staffordshire: Prime Minister’s speech’, (28 November 2014) . 1
Government’s renegotiation of the UK’s membership of the EU. Analysis suggests that, if the Government is able to implement it, cutting benefits would make the UK much less attractive.3 However, the Government’s separate plan to introduce a living wage for over-25s will significantly reduce the impact of this policy by substantially increasing wages for migrant workers - offsetting the impact of the benefits restriction. There have also been warnings that applying such a test to migrants alone would breach EU law. The Cabinet Secretary, Jeremy Heywood, has been reported as warning ministers that the change could be illegal.4 According to media reports, the Government is now considering extending the rule to all UK benefit applicants from the age of 18. This would mean that Britons, even if they had always 5 lived in the UK would, from their 18th birthday, be ineligible for benefits for four years. This paper looks at four scenarios: the status quo (neither the benefits restrictions nor the living wage); the situation in 2020 imagining the Government has been able to introduce the benefits restriction but has not introduced the living wage; the situation in 2020 assuming the Government does stop benefits for EU migrants and introduces the living wage; and the situation in 2020 assuming the Government fails to stop benefits for EU migrants and still introduces the living wage. Our research finds that, even with a four-year ban on in-work benefits, thanks to the living wage, the UK will remain an attractive destination for EU migrants.
Methodology This paper builds on the methodology used by the 2014 Open Europe paper ‘Free Movement: keep it fair to keep it free’ to establish what the impact of the Government’s living wage reforms will be. This work was cited by the Prime Minister as evidence for the need for his EU reforms, claiming in November 2014 that ‘if you reduce the massive cash incentive for people to come from Europe to our country, they are less likely to come. I think that’s absolutely clear 6 from all the work done by the analysts and the experts and Open Europe and everybody else’. There are a number of differences between the results in this paper and the Open Europe study. Unlike Open Europe, which focused on the situation in 2014, this paper attempts to forecast the impact both today and five years into the future.7 It also uses the Universal Credit calculator to calculate UK benefits. (In-work benefits are a subset of UK benefits generally. They include disbursements such as tax credits. These should be distinguished from special non-contributory cash benefits like Jobseeker’s Allowance and Employment & Support Allowance. The Government is currently overhauling the benefits system to introduce the
3
There are questions about how far cutting in-work benefits will make the UK less attractive, as relatively few EU migrants claim in-work benefits, see 4 BBC News, ‘Cameron is warned key EU reform objective may be illegal’ (04/11/2015) 5 ‘EU migrant benefit plan 'could hit thousands of young Britons'’, (11 August 2015) . 6 David Cameron, ‘JCB Staffordshire: Prime Minister’s speech’, (28 November 2014) . 7 Assuming constant exchange rates.
2
8
Universal Credit. ) As a result of these changing circumstances and different sources, this paper reaches different numbers to the Open Europe report. In order to gauge how attractive the UK’s benefit system is, a comparison is made of four countries: the UK, Spain, Poland and Bulgaria. In each instance, the impact of moving to the UK from another EU country for a relevant person on the minimum wage with no children and a relevant person on the minimum wage with two children is calculated. As far as possible, tax calculators produced by PricewaterhouseCoopers (PwC) were used to help accurately calculate the final disposable income. Modelling the impacts At the moment, the UK is a very attractive destination for EU migrants: Weekly take-home income: single earner, minimum wage, no dependent children (2015) – PPP conversions UK Spain Poland Bulgaria £227.50 £178.41 £153.31 £77.87 Salary -£28.59 -£11.33 -£52.08 -£20.47 Total deductions £198.91 £167.08 £101.24 £57.40 Income post deductions £74.72 £48.19 £0.00 £0.00 Benefits £273.63 £215.26 £101.24 £57.40 Total +27%
Effect of moving to UK
+170%
+377%
Weekly take-home income: single earner, minimum wage, two dependent children (2015) – PPP conversions UK Spain Poland Bulgaria £227.50 £178.41 £153.31 £77.87 Salary -£28.59 -£11.33 -£52.08 -£20.47 Total deductions £198.91 £167.08 £101.24 £57.40 Income post deductions £234.17 £59.97 £65.36 £19.90 Benefits £433.08 £227.05 £166.60 £77.30 Total +91%
Effect of moving to UK
8
+160%
+460%
‘Q&A: Universal credit and the benefits overhaul’, BBC, (15 February 2015) .
3
It is possible to look at what the impact of the Government’s proposed reforms for restricting in-work benefits for four years may be. This can be done by adjusting the above figures for inflation and setting the amount of in-work benefits to ‘0’. This shows that the UK becomes far less attractive (N.B. this is based on adapting the old minimum wage levels, as they were set in November 2014, for inflation). These figures assume a consistent exchange rate.
Weekly take-home income: single earner, minimum wage, no dependent children (2020) – PPP conversions, adjusting current minimum wage for inflation UK Spain Poland Bulgaria £232.14 £181.14 £157.24 £79.54 Salary -£24.37 -£11.50 -£53.41 -£20.91 Total deductions £207.78 £169.63 £103.83 £58.63 Income post deductions £0 £48.92 £0 £0 Benefits £207.78 £218.56 £103.83 £58.63 Total -5%
Effect of moving to UK
+100%
+254%
Weekly take-home income: single earner, minimum wage, two dependent children (2020) – PPP conversions, adjusting current minimum wage for inflation UK Spain Poland Bulgaria £232.14 £181.14 £157.24 £79.54 Salary -£24.37 -£11.50 -£53.41 -£20.91 Total deductions £207.78 £169.63 £103.83 £58.63 Income post deductions £0 £60.89 £67.04 £20.32 Benefits £207.78 £230.53 £170.87 £78.95 Total -10%
Effect of moving to UK
4
+22%
+163%
This situation changes if, as planned, the living wage is introduced. Adjusting salary values for both announced policy changes and for inflation (again, assuming a consistent exchange rate), shows that while the attractiveness of the UK would still slightly diminish, it would remain a very appealing destination for EU migrants. The impact of the reforms on single earners is nearly completely negated when compared to the current situation, and the impact on those with two children is substantially mitigated.
Weekly take-home income: single earner, minimum wage, no dependent children – w ith EU migrant benefit reforms (2020) – PPP conversions, living wage applied UK Spain Poland Bulgaria £315.00 £181.14 £157.24 £79.54 Salary -£49.23 -£11.50 -£53.41 -£20.91 Total deductions £265.77 £169.63 £103.83 £58.63 Income post deductions £0.00 £48.92 £0 £0 Benefits £265.77 £218.56 £103.83 £58.63 Total +22%
Effect of moving to UK
+156%
+353%
Weekly take-home income: single earner, minimum wage, two dependent children - with EU migrant benefit reforms (2020) – PPP conversions, living wage applied UK Spain Poland Bulgaria £315.00 £181.14 £157.24 £79.54 Salary -£49.23 -£11.50 -£53.41 -£20.91 Total deductions £265.77 £169.63 £103.83 £58.63 Income post deductions £0 £60.89 £67.04 £20.32 Benefits £265.77 £230.53 £170.87 £78.95 Total +15%
Effect of moving to UK
5
+56%
+237%
Finally, we can assess the impact of the living wage proposals were the Government to fail to introduce the four-year residence test. This shows, unsurprisingly, that the UK would be far more attractive to EU migrants than it is at the moment.
Weekly take-home income: single earner, minimum wage, no dependent children - without EU migrant benefit reforms (2020) – PPP conversion UK Spain Poland Bulgaria £315.00 £181.14 £157.24 £79.54 Salary -£49.23 -£11.50 -£53.41 -£20.91 Total deductions £265.77 £169.63 £103.83 £58.63 Income post deductions £76.24 £48.92 £0 £0 Benefits £342.01 £218.56 £103.83 £58.63 Total +56%
Effect of moving to UK
+229%
+483%
Weekly take-home income: single earner, minimum wage, two dependent children - without EU migrant benefit reforms (2020) – PPP conversion UK Salary Total deductions Income post deductions Benefits Total
£315.00
Spain £181.14
Poland £157.24
Bulgaria £79.54
-£49.23
-£11.50
-£53.41
-£20.91
£265.77
£169.63
£103.83
£58.63
£238.95
£60.89
£67.04
£20.32
£504.72
£230.53
£170.87
£78.95
+119%
+195%
+539%
Effect of moving to UK
6
Our working for the data in each of the tables is provided below:
UK - 2015 Income and deductions The UK’s current minimum wage is £6.50 an hour. This translates to £227.50 per week (assuming a 35 hour working week). The UK’s current income tax per week is calculated as follows. There is a £10,600 tax free 9 allowance per year. With 20% income tax on the minimum wage, this works out as £4.73 per week . National Insurance contributions (which are 12% for earnings over £155 per week) work out as £8.70 per week . 10
The average Council Tax payment per dwelling in 2014/15 was £1,051. This translates to £20.21 per week – or £15.16 per week after factoring in the single person discount of 25%. Taken together, this means that deductions amount to £28.59 per week on the minimum wage. Total benefits To calculate benefits, the relevant person’s details were entered into a Universal Credit 11 calculator. A healthy, single, childless person who is 28 and lives in a one bedroom council or housing association property, working full time on minimum wage, is entitled to £74.72 per 12 week on Universal Credit. By contrast, a healthy, single person with two four-year-old children, who is 28 and lives in a two bedroom council or housing association property, working full-time on minimum wage, is entitled to total benefits of £234.17 per week from both Universal Credit and Child Benefit (Child Benefit is paid at a flat rate of £20.70 per week for the first child and £13.70 per week for the second. This amounts to £34.40 per week). UK - 2020 Income and deductions The living wage in 2020 will be £9 per hour, the equivalent of £315 per week (again, assuming a 35 hour week). (Without living wage, the old minimum wage adjusted for inflation would have been £232.14 per week.)
HM Treasury, ‘Tax and tax credit rates and thresholds for 2015-16’, (Accessed: 5 October 2015) . 10 DCLG, ‘Council tax levels set by local authorities in England 2015-16 (Revised) ‘, (15 July 2015) Please note this refers to the average tax incidence for all types of dwelling. 11 Universal Credit Calculator . 12 The location was set to be near Guildford as a generic placeholder example of a non-London UK city. 9
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By 2020, the Government intends there to be a £12,500 tax free allowance. We assume that income tax will remain at 20% as the Government is committed to not increasing income tax 14 rates. This amounts to income tax of £14.92 per week . Assuming that National Insurance in 15 2020 will start at £158, deductions will be £18.84 per week . To calculate the average Council Tax payment, we can use IMF inflation forecasts to uprate the current annual figure of £1,051 to £1,072. This amounts to £20.62 per week or £15.47 per week after factoring in the 25% single person discount. Without the living wage, the old deductions, adjusted for inflation, would have been £ 24.37 per week. Total benefits To calculate benefits per week, the 2015 value is adjusted for inflation. This means that for people without dependent children, total benefits are £76.24 . For someone with children, the total 2020 benefits are £238.95 . Spain – 2015 16
These calculations were informed by the PwC calculator. Income and deductions
The Spanish statutory minimum wage in early 2015 was €756.70 per month, the equivalent of €170.87 per week or £178.41 per week . Spain does not require people on minimum wage to pay income tax, but they are required to pay 4.7% from the contribution base towards ‘common contingencies’, 1.55% towards ‘unemployment’ and 0.1% towards occupational training. These deductions amount to €10.85 per week or £11.33 per week . Someone with two children can claim €11.29 per week from the state for child support, or £11.79 per week . A person, regardless of their number of children, can claim up to €46.15 per week (£48.19 per week) in housing benefit. Spain – 2020 By adjusting all figures for inflation, we can work out that the projected values for income and benefits in Spain will be as follows: Income and deductions
HM Treasury, 'Tax and tax credit rates and thresholds for 2015-16' ; Finance Bill 2015, clause 1. 14 Conservatives, 'The Conservative Party Manifesto 2015', . 15 Based on taking the 2015 figure of £155 and uprating using IMF inflation forecasts. IMF figures can be found at . 16 PwC, 'Spain - Individual - Sample personal income tax calculation', . 13
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The Spanish statutory minimum wage can be estimated as €768.28 per month, the equivalent of €173.48 per week or £181.14 per week . As previously stated, Spain does not require people on minimum wage to pay income tax, but they are required to pay 4.7% from the contribution base towards ‘common contingencies’, 1.55% towards ‘unemployment’ and 0.1% towards occupational training. After adjusting current figures for inflation, these deductions amount to €11.02 per week or £ 11.50 per week . Someone with two children can hope to claim €11.46 per week from the state for child support, or £11.97 per week . A person, regardless of their number of children, should be able to claim up to €46.86 per week ( £48.92 per week) in housing benefit. Poland – 2015
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Payments can be calculated by using the PwC sample pension income tax calculator. The Polish minimum wage per month is 1,750zł , the equivalent of 395.16złper week, or £153.31 per week . Poland requires employees to pay into a number of insurance funds. The rates can be confusing, as different percentages have to be contributed by employees and the rest by the employer. A review of the system shows that an employee is expected to pay the following into the various funds: Emerytalna (Pension): 9.76%, Chorobowa (Illness fund): 2.45%, Rentowa (Disability): 1.5%, fundusz pracy (Employment fund): 2.45% and fundusz gwarantowanych swiadczeńpracowniczych (Employee benefit funds): 0.1%. For someone on the minimum wage, these deductions amount to 64.25złor £ 24.93 per week . After this, income tax is calculated. Poland has an annual tax free allowance of 3,091zł. This means that, with an effective tax rate of 10.25%, income tax is 34.41złor £13.35 per week . Following this, health insurance at 9% of remaining income is deducted – this amounts to 35.56zł , or £13.80 per week . Therefore, total deductions are £52.08 per week . The amount of benefits for the first and second child is 1112.04złper child (relief for the third child is 2000.04zł , and all others 2700zł ). This means that someone with two dependent children, who is also entitled to child benefit of 48.92złand additional payments of 76.77zł per week can hope to claim about 168.46zł , or £ 65.36 per week
During the production of this report, questions were raised about the methodology used by Open Europe, in particular over their adjustment for PPP. Multiple sources were used by Open Europe to calculate PPP exchange rates, instead of one constant source. This appears to have had the effect of artificially bolstering the conversion rates for Polish salaries, by around 13%. This paper consistently uses World Bank conversion tables. 18 PwC, 'Poland - Individual - Sample personal income tax calculation', . 17
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Poland - 2020 Again, new values can be calculated by adjusting all figures for inflation and by using the PwC 19 sample pension income tax calculator. The Polish minimum wage per month can be put at 1,794.87zł, the equivalent of 405.29złper week, or £ 157.24 per week . Adjusting insurance contributions for inflation shows that someone on the minimum wage will be expected to pay 65.90złor £25.57 per week . Poland’s annual tax free allowance can be estimated as 3,170.25zł . This means that, with an effective tax rate of 10.25%, income tax amounts to 35.29złor £13.69 per week . Following this, health insurance at 9% of remaining income is deducted – amounting to 36.48zł , or £14.15 per week. Therefore total deductions are £53.41per week . Someone with two dependent children can hope to claim £67.04 per week in child benefits. Bulgaria - 2015 The Bulgarian minimum wage is 340лв per month, or 76.77лв per week – the equivalent of £77.87 per week . As previously explained, 10% flat tax has to be paid on this, amounting to £7.79 per week for someone on the minimum wage. Following this, payment has to be made into retirement pension insurance (5.7%), the additional compulsory pension insurance (2.2%), sickness and maternity insurance (1.4%), accident insurance (0.4%); the employment fund (0.4%) and the national health fund (8%). This amounts to total deductions of 20.18лв or £20.47 per week. In addition, people in Bulgaria are entitled to monthly child allowances. They receive 50лв for the first child and 35лв for the second. Someone with two dependent children will thus receive 19.62лв, or £19.90 per week.20 Bulgaria - 2020 The Bulgarian minimum wage, adjusted for inflation, can be estimated as 347.29лв per month, or 78.42лв per week. This translates to £ 79.54 per week . A 10% flat tax has to be paid on this wage, amounting to £7.95 per week for someone on the minimum wage. Following this, payment has to be made into retirement pension insurance (5.7%), the additional compulsory pension insurance (2.2%), sickness and maternity insurance (1.4%), accident insurance (0.4%), the employment fund (0.4%) and the national health fund (8%). This amounts to total deductions of 20.62лв or £20.91 per week . Someone with two dependent children will receive 20.04лв, or £20.32 per week .
PwC, 'Poland - Individual - Sample personal income tax calculation', . 20 These figures are different to those produced by Open Europe. Open Europe appear to have treated the 85лв figure as an annual rather than monthly figure. 19
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