When the government’s Emergency Budget was announced, it hit families very hard – and a lot of mums started thinking that maybe working too many hours is not worth the hassle.

So, would reducing your hours at work be to your advantage when income tax rises in April? Norma Stewart of Wellers Accountants (www.wellersaccountants.co.uk) takes a look at whether higher income taxes create a disincentive to working longer hours.

There are two basic economic arguments behind whether higher taxes either increase or decrease working hours: the Substitution Effect and the Income Effect.

Under the Substitution Effect, higher tax makes work less attractive and reduces the opportunity cost of leisure. Therefore people work less and enjoy more leisure.

The Income Effect, on the other hand, argues that higher tax reduces income and may encourage people to work more to maintain that income.

Let’s take a case study to highlight the two affects:

Joanna works 30 hours and keeps her entire hourly wage £10, earning a total of £300 per week. If we now impose a tax rate of 20%, her take-home hourly wage falls to only £8. How will the fall in her take-home wage affect the number of hours Joanna decides to work?

First, because each hour of work is worth less in extra pay than before, we might expect Joanna to work fewer hours i.e. the substitution effect. Joanna substitutes leisure time for working time because it now only costs her £8 in lost wages if she works an hour less, rather than £10.

On the other hand, economists typically assume people consume less of something the less income they have so under the Income Effect, if Joanna’s income has dropped from £300 to £240 at 30 hours, she will actually ‘consume’ less leisure time and actually work more hours to maintain the same income.

While there is much debate about the effects of tax on labour supply, it is generally assumed that:

1. A tax tends to discourage work, particularly for married women with young children. But the effect is not large.
2. A higher tax tends to affect part-timers more than those working full time.
3. Hours of work are only one of many aspects of labour supply potentially affected by taxation. Incentives to educate oneself or engage in training, to seek promotion or put in effort and decisions about how to allocate work-time over our lives seem to be affected too.

So, it seems to come down to what type of person you are, what your incentives for working are, what hours you work, what your income is and how you draw a salary. It is safe to say however that the new higher taxes the government has introduced may cause some of us to think twice about working late again!