Brave new world of UBI?

If those three letters mean nothing to you now, they may do soon.

Universal Basic Income (UBI) has become a topic attracting attention among some think-tanks and political parties, both in the UK and overseas. The idea behind UBI is simple and has an obvious electoral appeal.

In its most basic form, UBI would give every citizen a government paid regular cash income, subject to the most minimal of qualifications, eg 18 or over and not imprisoned. Millionaires and paupers, students, full time employees and pensioners would all receive the same amount. In theory, UBI offers the opportunity to revise radically – or even abandon completely– the existing support systems of means-tested social security benefits and tax credits. In practice many UBI proposals recognise that that there would probably need to be some additional benefits for people with disabilities.

Unsurprisingly, the question of whether UBI is affordable is a contentious one. The corollary is whether what is affordable could be classed as a meaningful UBI. A good example of the affordability question emerged in a structure recently put forward by the New Economic Foundation (NEF). This think tank suggested for the UK excluding Scotland:

  • Scrapping the income tax personal allowance;
  • Replacing it with a UBI of £48 a week for everyone aged 18 or over with a National Insurance Number and income of up to £100,000 a year;
  • Adjusting means-testing to allow for UBI; and
  • Restoring the real value of Child Benefit to its 2010/11 value, before benefit freezes started to erode its purchasing power.

The NEF calculates that such reform would generate a net saving of £2.9bn for the Exchequer. If that seems surprising, it is because of the subtle impact of replacing the personal allowance (worth £2,500 a year to a basic rate taxpayer) with a UBI of about the same amount. The reform would mean that the higher rate tax threshold dropping to £37,500 (from the current £50,000), leaving most people with income above that level worse off. As the NEF said, the effect is their proposals would be “highly redistributive”.

John McDonnell, the Shadow Chancellor, has said that he would trial UBI if Labour were elected. It is not inconceivable that a future Conservative chancellor might ‘borrow’ some UBI ideas, given the long running problems surrounding Universal Credit. Pre-election tax planning may have already begun.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

21st June 2019

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