Retailers call for tax cuts to tackle benefits trap

Britain's retailers are calling on the Government to cut taxes for the low-paid and make the move from claiming benefits into work more attractive, writes Diane Coyle.

In an echo of Labour's "welfare to work" policy, the British Retail Consortium argues that the disincentives to work, due to the loss of benefits for people who start earning, are too great. Starting wages in retailing are low enough to be competing with social security.

The BRC's pre-Budget submission to Chancellor Kenneth Clarke, the first of the season, says there should be modest tax cuts "targeted towards the lower end of the income spectrum". It argues for higher allowances or a wider low rate band.

Andrew Higginson, chairman of the BRC's economic affairs committee, said: "Potential employees are saying to us that it is difficult for them to give up their welfare benefits. As employers we want to see that addressed."

The submission says: "The interaction between the tax and benefit systems can result in individuals being unwilling to take work for fear of being made worse off as a result."

It also calls for reform of the employers' national insurance rates to remove the big step change in their liability - from pounds 3.15 to pounds 5.50 - at pounds 110 a week. This discourages them from hiring staff for more than a limited number of hours a week, according to the retailers, most of whom have many part-time employees.

Potential recruits can be better off turning down pay of up to pounds 4.50 an hour and staying unemployed because they lose benefits at such a sharp rate when they move into work. That level is well above the pounds 3.50 that the Labour Party is expected to set as a minimum wage, and close to the typical pay level in most of the big retail groups.

A married person with two children would only be pounds 17.40 better off as a result of taking a job paying pounds 140 a week. The reason for the high effective tax rate on the extra earnings is mainly due to the loss of housing and council tax benefits, along with additional costs such as travel and child care.

The possibility of working in the "informal" or "black" economy on top of claiming benefit adds to the unattractiveness of taking a low-paid job. Some estimates put potential average earnings from benefits plus the informal economy at over pounds 200 a week. Benefit fraud is thought to exceed pounds 2.5bn a year.

The BRC has added pleas to reduce the administrative burden on small businesses and the extension of capital allowances to commercial buildings to its Budget shopping list. It wants the Uniform Business Rate to go up by less than inflation, on top of keeping the transitional relief scheme in force.

The retailers' trade association has also joined the drinks lobby in pleading for further reductions in alcohol duties, to bring the UK closer in line with Continental countries.