Some workers in receipt of Universal Credit would receive as little as £75 of the £300 bonus, an effective tax rate of 75%. Others get a higher proportion of the bonus, but still face a bill higher than the average tax-payer despite being badly enough off to qualify for benefit payments.
Obviously low-paid workers shouldn't be paying taxes at this rate, and the case has generated a lot of media coverage, petitions, and various proposals, including one from David Linden MP not to treat bonus payments as income.
The Universal credit scheme has been beset with problems. It is a good idea in theory to have a joined-up benefit system which gives people an incentive to work, but it is fiendishly difficult to put this ideal into practice.
The problem in the bonus case is that it is a one-off payment. But the Universal Credit system is looking at short term income levels.
My Hourly Averaging proposal aims to do the same thing as the Universal Credit; to make work pay and assist the poorest in society.
Hourly averaging, however, would have no difficulties with the bonus issue. Each person has a tax-rate determined by their lifetime hourly income. A bonus of £300 isn't going to affect that lifetime calculation very much, and so the recipient will receive whatever percentage of the bonus they get for the other work they were doing. Someone whose tax-rate is 0% will receive the whole lot. Someone with a 25% will receive £225 and so on.
Low earners would never face a high tax bill on a small bonus because their lifetime hourly average will be low. There could be exceptions; someone who works in a low-paid job but who received a huge inheritance could conceivably have a high tax-rate, say 70% on their bonus. But that is because they are genuinely fortunate--they have gained much more than their fellow workers, in this case because of their inheritance.
As so often, when there is hand-wringing about the tax-system or benefit system it occurs to me that hourly averaging would do it much better.
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