Manchester Metropolitan University (Policy Evaluation Research Unit)

Tax and benefits – a review of work incentives in the UK






January – December 2021

Grant Awarded



Project summary

A comprehensive assessment of work incentives in the UK’s tax and benefit system.


The tax and benefit system is in a period of considerable flux. Universal Credit (UC) was intended to be a simplification of the system which would ensure claimants would always be better off from entering work or earning more. Yet under UC, four million people will still face Marginal Deduction Rates (the proportion of an increase in earnings that is lost through paying higher taxes and receiving lower benefits) of at least 70% and 2.5 million Personal Tax Rates of at least 70%.

UC has also brought new complexities: a long transition, complex self-employment rules, and new interactions with other parts of the system.

Project overview

The project will identify where, and why, work incentives remain poor for so many people by conducting a comprehensive study of work incentives throughout the tax and benefit system. It will identify groups and characteristics subject to the highest disincentives, explaining which features of the tax and benefit system are responsible for these disincentives. The final report will make recommendations for policy changes.

It will achieve this by developing a synthetic microsimulation approach, constructing hypothetical families that encompass a full range of possible combinations of circumstances. For example relating to work status, tenure, earnings, household composition. It will use this capability to build synthetic datasets of several million hypothetical families where each characteristic is varied in turn. This new and innovative approach will allow much-needed insights into combinations of characteristics not usually found in sample surveys. Scenario testing of alternative tax and benefit schedules will identify which features of the system are responsible for creating high disincentives.