A couple of days before the budget the Low Pay Commission confirmed in a press release that the minimum wage would rise to Â£5.35 in October. This is good news for the low paid. On budget day the Chancellor again used fiscal drag to pull yet more people into paying higher tax. This does not exclude the low paid. That’s the bad news.
A person on the minimum wage working a 37.5 hour week was taxed at 6.02% when the minimum wage came into force on the 1st April 1999 and will be taxed at 8.91% in October of this year. Whilst the minimum wage has increased by 49% since it was introduced the personal allowance has only increased by 16% in the same time. The effect of this fiscal drag is to divert cash from the lowest paid to the state on a massive scale.
The Low Pay Commission have researched low pay in great detail but I have searched their first 6 annual reports and have failed to find any comment from the LPC on the way that the Chancellor is taking a higher and higher proportion of the minimum wage each year. He is happy to use fiscal drag to clobber the middle classes but in doing so he has also managed to move the tax rate for the lowest paid workers from 6% to 9%.