From the TUC

The Budget and Tax Credits

22 Jun 2010, by in Society & Welfare

One of the surprises of today’s Budget is the assault on the tax credit system – it’s much more severe than I was expecting.

These changes will exclude hard-pressed middle-income workers, increase the marginal effective tax rates faced by low paid workers, hit families with young children, penalise claimants who are late in reporting changes of circumstances and increase the uncertainty for workers in insecure jobs. Possibly the worst change of all is the reversal of a previous reform that was introduced to deal with the problems that were faced by workers whose incomes rose during the year and found themselves with huge arrears to pay back.

It’s worth listing the changes in full, together with my explanation of why they are problematic.

  • From next April the second income threshold for the family element of the Child Tax Credit will be cut from £50,000 to £40,000. One of the attractive features of the CTC is the way it makes sure that most families gain something from the system – it is important for ensuring middle-class ‘buy-in’ to a programme that gives most to the poor, and we can expect to see voter support for generous tax credits decline as a result. More importantly, it recognises the fact that middle-income families can find that their children’s needs stretch the family’s budget.
  • From next April the rate at which tax credits are withdrawn will rise from 37% to 41%. This will increase the marginal tax rate low paid workers will face. Everyone will face a 4 percentage point increase in their marginal effect tax rates; add this to income tax and, in some cases, Housing Benefit and Council Tax Benefit, and some people will face combined tax and tax credit withdrawal rates of well over 60%. The Budget Report acknowledges that the Budget increases the number of people facing a marginal rate of 90 per cent or more from 110,000 to 130,000 and the numbers facing a rate of 60% or more from 1,895,000 to 1,935,000.
  • From next April the baby element will be removed from the Child Tax Credit and the toddler supplement promised by the last government will be withdrawn. As Nicola has pointed out, this is one of a series of tax credit and benefit changes that will cost families with babies £1,293 a year.
  • From April 2012 the 50+ element will be removed from the Working Tax Credit. Nothing will be put in its place to help older people returning to the labour market.
  • From April 2012, backdating of changes of circumstances will be reduced from three months to one month. This will inevitably have the worst consequences for vulnerable low paid workers, who are most likely to get into difficulty with keeping HMRC informed.
  • From April 2012, a £2,500 disregard will be introduced for falls in income. The Budget Report gives no more details, but this seems to mean that low paid workers whose income falls after they have put in their claim will have to make do with the same amount of WTC. Take, for instance, someone whose firm is in difficulties because of the recession, and they lose regular overtime or have to accept shorter hours. One of the advantages of the tax credit system has been that it has been some help to workers coping with having to work reduced hours but this change will mean that tax credits become much less effective at cushioning people from changes like this.
  • From April 2011, the level of in-year rises of income that will be disregarded when calculating entitlement will fall from £25,000 to £10,000. From April 2013, this will fall to £5,000. These changes were introduced with an early problem with the tax credit system: people whose income increased during the year – because they got a promotion, or a better paying job, for instance – could find that they owed HMRC thousands of pounds in arrears. At the very least, this led to huge cuts in the amount of tax credit they were entitled to, for some it also meant massive burdens of debt. At the time, the Conservatives and Liberal Democrats complained about this vociferously. The current rules have successfully eliminated this problem; we can expect the changes announced today to lead to its re-emergence.

These changes will seriously damage popular support for generous tax credits. It isn’t merely the well-off who will lose out. Conservative and Liberal Democrat MPs laughed when the Chancellor talked about people earning over £80,000 receiving tax credits. They are not typical of the losers. From the Budget Report (table A1) it is clear that families earning less than £15,000 a year will receive less from the tax credit system as a result of the changes in this Budget.

I have to admit that I’m surprised that the government has been so extreme in its assault on Working Tax Credit and Child Tax Credit. Iain Duncan Smith’s plans for a system he calls ‘Dynamic Benefits’ are essentially based on extending the tax credits to the whole working age benefit system. These reforms will undermine support for that system, return us to the days of glaring injustice and increase the marginal effective tax rates IDS rages about when he is complaining about work disincentives.

5 Responses to The Budget and Tax Credits

  1. Daily Cuts Briefing – Wednesday 23rd June « A Thousand Cuts
    Jun 23rd 2010, 10:11 am

    […] the TUC demystifies the Budget’s web of tax credit changes… […]

  2. Lee Burnham
    Jun 23rd 2010, 3:38 pm

    Hi, im not quite understanding all this, i just really want to know how its going to affect me and my family. My wife works a 20hour week, i work 16 hours at minimum wage. This may sound lazy but my wife has been in the same career for the last 10years and took shorter contracted hours when our now 3year old twin boys were born, she is now struggling to get back into a fulltime contract. I, on the other hand have suffered a serious mental illness for the last 8 years so i am doing the best i can employment wise with my condition.

    So, we earn about £12000 a year between us, obviously, this is topped up substancially by child tax credits, of which we get about £150 a week, then, also, for the two children, we get £130 a month for child benefit. Now, i have to say, without this money we would be screwed, we can barely survive with the tax credits, without i can only imagine we would be homeless as we wouldnt be able to pay our mortgage and bill.

    Because of my severe illness, i am not able to go out and get a 9 to 5 as it would, in all honesty, finish me off, i tried so many times before and failed.

    So, what i want to know really, is are we gonna lose the child tax credits which we survive on? If so, is there anything that will be put in place to replace that benefit? Im sure their are millions of other people in the same boat as me and my wife, though i wouldnt know it judging by all the new cars and Iphones i see lol.

  3. Benefits Advisor
    Jun 23rd 2010, 8:14 pm

    Go to your local CAB and get a benefits check done.

  4. Adam
    Jun 30th 2010, 2:45 pm

    Yes, I find it very surprising that government does not care about supporting tax paying people. I would have imagined they would cut benefits for those who do not work or slash a bit of that whopping NHS budget. But they rather have someone sitting on a dole than work and claim tax credits. Talk about incentives.

    They also seem to forget how ridiculously expensive education is in this country. UK spends loads on not so neccessary things which could be cut, rather than hitting people on 30,000 annual joint income and less. This is just 15,000pa each – ridiculous salary, really. 40,000 annual joint family income is below average, as well.

    What is also frustrating, that these changes have not been mentioned in a full budget report in detail (which I have downloaeded and had a peek at, BTW). I am glad I had found this article.

    Conservatives showed their true face, in the end. And so have Liberal Democrats…

  5. Cuts Watch: The consequences of Mr Osborne | Left Foot Forward
    Aug 6th 2010, 9:53 am

    […] Grant and all children will lose out because of the 3-year freeze of Child Benefit. Cuts in tax credits worth £3.2 billion are dwarfed by what looks like a technical change: uprating benefits and public […]