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21 October 2015

Tax Credit Cuts Explained

As the CCA's members will be aware, the government announced its plans to reform the current tax credits system as part of the Summer budget.  The critics argue that this will result in many families being worse off whilst the government is saying that the reforms will save tax payers £15bn a year.  

Earlier this week more details on the reforms were released.  Some of our members' customers may be affected by the changes so the CCA have outlined the key points to give you a better understanding of what they will mean to low income households.

What are tax credits?

Tax credits are designed to help families and people on low incomes by topping up their wages.  To be eligible to receive tax credits, a person does not need to be actually paying tax.  There are two types of tax credits:

  • Working Tax Credit - cash paid to people over 25 working a minimum number of hours a week (30 hours for a single, able-bodied person aged 25 - 59) depending on their personal circumstances ie. whether they have children or a disability
  • Child Tax Credits - cash paid to families for each child up to the age of 16 (or 20 if in education) depending on the family's circumstances - currently families can claim up to £2780 per child with additional payments available for parents of disabled children

 

What are the changes?

Working Tax Credit - The amount that you can earn before tax credits start to reduce has been cut from £6420 to £3850 from April 2016.  When claimants earn more than the threshold, the rate at which credits reduce has increased from 41% to 48%.  So workers will lose 48p for every £1 that they make above the threshold.

Child Tax Credits - From April 2017, families will only be able to claim for a maximum of two children but this will only apply to third and subsequent children born after April 2017. The flat £545 'family element' which is paid regardless of the number of children will no longer be paid to workers who start their families after April 2017.  

Will people be worse off and who will be worse affected?

The Treasury is saying that most working households will be better off once all of the welfare reforms have come into force by 2017.  However independent analysis from the Institute for Fiscal Studies (IFS) suggests that families with someone in paid work will lose an average of £550 per year after the changes to taxes, tax credits and benefits are all factored in.

According to the IFS, people who live in households where no-one works will be hit hardest as they will lose out on income but will gain no benefits from the increase in the minimum wage.  The Think Tank, Resolution Foundation claim that working mothers could be worse hit and one million single parents will be £1000 a year worse off, while 1.5 million married mothers will lose out by £600 per year.Millions of people are due to find out how much money they will lose in letters which will be sent out just before Christmas.

More information on tax credits and the changes can be found on the Money Advice Service website.

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