Paying the price for Pay to Stay – Part 1

Originally posted on March 18 on Inside Edge 2, my blog for Inside Housing

Thanks to the persistence of a group of peers, we now know a little bit more about how the government wants higher Pay to Stay rents to work for tenants.

The details emerged on the sixth day of the committee stage of the Housing and Planning Bill on Monday (see Hansard here).

That followed confirmation in a government consultation response last week that there will be a taper and that tenants on housing benefit claimants will be exempt. As I blogged the next day, this was presented as a climbdown. The government says tenants on incomes just above the thresholds ‘will see their rent rise by only a few pounds each week’. However, it also begged yet more questions.

We got answers to some of them on Monday night but – this being the back of a fag packet Housing Bill – only some. And it goes without saying there are yet more questions too. Here’s what I picked up:

1) How will the tapers work? This is the thing that thousands of council tenants fearing huge rent hikes most want to know. In the debate on Monday, Lord Best revealed that the minister Baroness Williams has written to peers setting out two options:

– A rent rise of 20p for every £1 of annual income above the limit

– A rent rise of 10p for every £1 of annual income above the limit.

Taking his examples, that would mean a household of two earners with an income of £40,000 outside London (£10,000 above the £30,000 threshold) would face a rent increase of £2,000 a year or around £40 a week on the higher taper. On the lower taper, the same couple would pay £500 a year or around £20 a week more.

The same as I read it would apply to a household with an income of £50,000 (£10,000 above the £40,000 threshold) in London. To put it another way, for every £5,000 of income above the threshold tenants would have to pay either £500 a year or £1,000 a year more.

As Lord Best pointed out, both are a considerable extra burden on two people earning well under the national average, but ‘the headline here, following the letter to peers from the minister, is that Pay to Stay will not be quite as dreadful as it appeared earlier’.

That may come as some comfort to tenants fearing an increase to full market rates could see their rent double, treble or even quadruple if their income was even a single pound over the threshold. However, the government has always said there will be a taper so it remains to be seen how much of a climbdown this really is. On the one hand, nurses, paramedics and even people on the Living Wage will still face a big rent increase, especially if the government opts for the 20p rate. On the other, depending on their circumstances they may be entitled to housing benefit (see below) and so could be exempt.

And what happens to households with incomes of £50,000 or more, who the government still seems to think should pay full market rents? On the 10p taper, an income of £49,999 means paying an extra £19 a week. Does that mean if you earn £1 more the increase could be £200 or more as the cliff edge moves up the income scale? Or does the rent carry on increasing slowly until it reaches market levels?

A final decision on these and other points will no doubt be taken ‘in due course’. And in the meantime there are more questions.

2) What are market rents? This is a complex subject in its own right, as the wild variations in different rent indices show.The government could take Valuation Office Agency figures for rents or it could take LHA rates as the benchmark (the government has said from the beginning that high income tenants should pay ‘market or near market rents’). The choice will make a huge difference to tenants on higher incomes and to the amount that Pay to Stay will raise. There are areas where LHA rates are lower than social rents and the tapers above suggest that many tenants could be paying closer to ‘Affordable’ Rents. Needless to say, the government has not yet said how market rents will be determined.

3) What are incomes? Pay to Stay will effectively be a supplementary income tax that only applies to council tenants. Depending on the taper, the 20p basic rate of tax will become 30p or 40p. But what are incomes?

It’s important to realise this is not just about high earners. All income could potentially be taken into account including pensions and benefits. Housing benefit claimants will be exempt but it will cease to exist as a separate benefit when it gets merged into universal credit? What happens then?

Baroness Williams said that:

‘We have not decided whether it will be calculated by looking at taxable income and we are also considering whether it should be based on previous income or current income.’

She hinted later that the government would exempt certain benefits from the definition of income. To take one example:

‘It is worth highlighting now that the disability living allowance is not a taxable benefit. It is unlikely that we would include income from this in the final definition of income.’

But she said she was ‘not attracted to an exemption for people over 65’:

‘Income from pensions can be considerable and it would not be right to exempt a group of people who are mainly retired but where the annual income is greater than that of people in work.’

In an era in which the over-65s have enjoyed the triple lock on their pensions and been protected from most cuts in benefits (including the bedroom tax), Pay to Stay is again unique.

And how will the system cope with fluctuating incomes. What about the self-employed? Those on zero-hours contracts? People who lose their job or have their hours cut? Baroness Lister told peers that a similar system had been discontinued in most of Germany ‘partly because of the bureaucratic costs of keeping tabs on incomes’.

4) What about housing benefit? The government says anyone receiving housing benefit will be exempt but how will this work? The latest UK Housing Review (published before the exemption was announced) points out that a couple with two children and a rent of more than £120 a week would be entitled to housing benefit at the same time as their rent increased. Under universal credit rules, the same applies to a rent of more than £50 a week. It sounds a right mess.

5) What about household costs? Incomes are only one part of the equation. As things stand Pay to Stay will be just about the only means test that looks at incomes without looking at expenditure too. What about the extra costs of bringing up children? What about disabled people with much higher costs? Will the government really expect them to give up their expensively adapted home because they can no longer afford the rent? As shown above, the exemption for being in receipt of housing benefit takes account of some of that by proxy but it looks fiendishly complicated. There will also be a huge incentive for people eligible for small amounts of housing benefit to make sure they claim it.

That’s where I’ll end Part 1 of this blog. Part 2 looks at issues including the costs of administering the policy for councils, hints about housing associations and how much Pay to Stay will raise for the Treasury.