The marginal tax rate measures how much of each extra pound of income is lost to taxes or withdrawn benefits. For people receiving Universal Credit or other welfare support, this can be very high because as earnings rise, benefits are reduced.
Under Universal Credit, the main withdrawal rate is 55%, meaning claimants lose 55p of benefit for every £1 of extra earnings after tax. On top of this, they also pay income tax (20%) and National Insurance (8%) once their earnings pass the thresholds. This can create combined marginal tax rates of over 70% for some low-income workers — in other words, they keep less than 30p of every extra pound earned.
Other benefits, such as housing support or council tax reduction, can further increase these rates. In some cases, overlapping benefit withdrawals have created “poverty traps,” where working more hours brings little or no financial gain.
The government has tried to reduce these effects by raising work allowances and lowering the taper rate, but the problem of high marginal tax rates for low earners remains a major issue in UK welfare policy.
So that can create disincentive to work longer hours or even work at all, especially if it is costly to go to work – paying for childcare, transport.
Example: How Marginal Tax Rates Add Up for Low Earners on Universal Credit (2025)
| Component | Rate (%) | Explanation |
|---|---|---|
| Income Tax | 20 | Basic rate once income passes the personal allowance (£12,570) |
| National Insurance (employee) | 8 | Payable on earnings above £12,570 (from April 2024 reform) |
| Universal Credit taper rate | 55 | Benefits reduced by 55p for each £1 of extra earnings (after work allowance) |
| Total Marginal Effective Rate | 69% | Combined loss from taxes and withdrawn benefits |
Cost of losing health benefits
Jobless single parent claiming for anxiety and child with ADHD will get nearly £37,000 a year – £14,000 more than NLW worker
Figure 1. Forecast welfare benefits compared to earnings after tax – existing claimants, 2026/27
Figure 1. Forecast welfare benefits compared to earnings after tax – existing claimants, 2026/27The CSJ claim that, in 2026/27, an economically inactive claimant on Universal Credit (UC) with the average housing benefit and Personal Independence Payment (PIP) for ill health could receive an income of around £25,000 – rising to £27,500 for those awarded PIP’s highest rate.
By comparison, a full-time worker on the National Living Wage (NLW) is expected to earn £22,500 after paying income tax and national insurance – leaving a £2,500 gap between work and welfare for existing claimants.
Two different examples
Scenario A — “Lower PIP, average rent”
- UC standard (12×£400.14) = £4,801.68
- UC LCWRA (Limited Capability for Work and Work-Related Activity.) (12×£423.27) = £5,079.24
- Housing support (52×£153.19) ≈ £7,965.88
- PIP standard daily-living only (52×£73.90) ≈ £3,842.80
Total ≈ £21,689.60 (≈£21.7k).
Scenario B — “Higher PIP, high-rent LHA cap (Oxford)”
- UC standard = £4,801.68
- UC LCWRA = £5,079.24
- Housing element (Oxford 1-bed LHA ≈ £900/mth) = £10,799.88
- PIP enhanced DL + standard mobility: (52×(£110.40+£29.20)) = £7,259.20
Total ≈ £27,940 (≈£27.9k).
Use: demonstrates how totals can exceed £25k where LHA caps are high and PIP is at the enhanced (DL) rate.
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