Shadow work and pensions secretary Jonathan Reynolds set out the first details of his party’s planned shake-up of welfare and scrapping of Universal Credit, which he said would help the low paid.
But while promising a “new deal” for the low paid, he warned against claims Brexit and the end of freedom of movement was the answer to low pay, as job vacancies and wages surge and business reports a shortage of workers.
Universal Credit was introduced by former Conservative leader Sir Iain Duncan Smith rolling six different benefits or tax credits into one single payment.
It also allowed people to still claim welfare payments which tapered off if income from work increased so as to “always make work pay”.
Mr Reynolds pledged a Labour government would reduce the taper rate at which benefits are withdrawn as a person earns more money.
Under the current system, Labour say that for every £1 earned by a claimant, 63p is deducted automatically from their Universal Credit payment by the taper rate.
According to the party’s research, a single parent working 30 hours a week loses £573 a month of their Universal Credit entitlement – the taper rate combined with national insurance and income tax making their effective marginal rate of tax 75%.
But someone earning more than £150,000 a year only has an effective marginal rate of tax of 47%, according to Labour.
Mr Reynolds, speaking in Manchester, said: “That means those on low incomes pay a marginal rate of tax far higher than any other group in the country – including the Prime Minister.
“Labour is committed to a fairer system which means those who need help from the social security system are not punished for wanting to earn more and contribute more.
“We think the way the system operates, it interacts with people who are in low-paid work, does not work sufficiently well for them.”
The Institute of Fiscal Studies estimates for every percentage point the taper rate is reduced by would cost £350 million, but this depends on how many claimants there are at the time the reduction is made.
However Mr Reynolds said current wage increases and staff shortages does not mean Brexit is the answer to the problem of low pay in some sectors of the economy.
He added: “A lot of the academic evidence is not that increased labour supply led to wage stagnation.
“As I say the academic evidence is not, the UK’s problem with low wages and in-work poverty comes from the free movement that existed when we were members of the European Union.
“That doesn’t get us past the kind of conversations we need around employment rights, around access to being a trade union member, around things like how Universal Credit interacts with the world of work.
“These are all still questions that need answers and I don’t think, no the answer can just be put down to whether it’s a situation where we have freedom of movement and increase or decrease in the labour supply.”