From the TUC

Just two cheers for the #SpendingReview tax credit U-turn

25 Nov 2015, by in Society & Welfare

The headline news in today’s Spending Review and Autumn Statement is the decision not to go ahead with the cuts to tax credits that were due to take place next April. So let’s remember the cuts that were due to come into effect next April, with no protection for the tax credit claimants who were going to lose out:

  • Cutting the income thresholds in tax credits (the income a family can keep before the amount of tax credit they are entitled to starts to be reduced) from £6,420 to £3,850;
  • Increasing the taper rate (the proportion of earnings over the income threshold that is deducted from a claimant’s tax credit entitlement) from 41% to 48%;
  • Cutting the income rise disregard (the amount your income can go up during the tax year before your entitlement is affected) from £5,000 to £2,500.

We calculated that 11,400,000 people, in 3,500,000 households, would be worse off, with the average loss among losing families ranging from £1,110 a year in London to £1,480 in Northern Ireland. That isn’t going to happen

So, hurrah! And let me admit straight away that I didn’t think it was going to happen. But, as Geoff has explained, the government has had the equivalent of a windfall, part of which has been spent on reduced cuts. And its easier for the government to afford because the cuts to Universal Credit are still going ahead, which means that, as people are transferred from Working Tax Credit and Child Tax Credit to Universal Credit, they’ll still be moving to a new benefit that’s much less generous than was originally planned.

The spending review report shows that the cost to the government is very steep in 2016-17 and 2017-18, but dwindles away very quickly after that:

TC savings 1

The cuts to Universal Credit that are still going ahead include:

  • Freezing most of the elements of UC in cash terms.
  • Cutting UC work allowances for those without housing costs to £5,000 for those with children or with a limited capability for work, and removing them entirely for those without children.
  • Cutting UC work allowances for those with housing costs to £2,400 for those with children, and abolishing them for those without children.
  • Restricting the child element of Child Tax Credit and Universal Credit to two children per family from 2017/18.
  • Most elements of Universal Credit – along with most other working age benefits – will be frozen

We estimate that 31.8 million people in 10.8 million households will see their incomes fall. Even if we take into account the effect of the government’s planned increases in the income tax personal allowance and the new ‘national living wage’, when they have reached their maximum impact, these changes will substantially reduce the incomes of families at the bottom end of the income distribution and will have a worse impact on working families than out of work families:

UC losers 1

So let’s celebrate an important victory, but save the third cheer until the Universal Credit cuts have been reversed too.

One Response to Just two cheers for the #SpendingReview tax credit U-turn

  1. #SpendingReview 2015 – the Touchstone blog round up
    Nov 25th 2015, 9:32 pm

    […] credits. It avoids the hardship it would have inflicted on millions of low-paid families, though as Richard Exell points out, the cuts to Universal Credit are still there and will hit more people over time – 31 million […]