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| Tax credit changes: Who will be the winners and losers? | Tax credit changes: Who will be the winners and losers? |
| (about 9 hours later) | |
| Proposed changes to tax credits have been amongst the most controversial policies of the Conservative government, as it attempts to tackle the deficit. | Proposed changes to tax credits have been amongst the most controversial policies of the Conservative government, as it attempts to tackle the deficit. |
| The Treasury says that the changes will save £4.5bn a year from 2016. | The Treasury says that the changes will save £4.5bn a year from 2016. |
| And it claims most working families will still be better off by 2017, as a result of the introduction of the National Living Wage (NLW) and changes to income tax thresholds. | And it claims most working families will still be better off by 2017, as a result of the introduction of the National Living Wage (NLW) and changes to income tax thresholds. |
| But the independent Institute for Fiscal Studies (IFS) says that millions of working people will lose an average of £1,000 a year, as a result. | But the independent Institute for Fiscal Studies (IFS) says that millions of working people will lose an average of £1,000 a year, as a result. |
| So how will tax credits change from April 2016, and who will be the winners and losers? | So how will tax credits change from April 2016, and who will be the winners and losers? |
| What are tax credits? | What are tax credits? |
| Tax credits are nothing to do with paying tax. They are a series of benefits introduced by the last Labour government to help low-paid families. There are two types: Working Tax Credit (WTC) for those in work, and Child Tax Credit (CTC) for those with children. Tax credits are gradually being included within Universal Credit, which is being rolled out across the country. | Tax credits are nothing to do with paying tax. They are a series of benefits introduced by the last Labour government to help low-paid families. There are two types: Working Tax Credit (WTC) for those in work, and Child Tax Credit (CTC) for those with children. Tax credits are gradually being included within Universal Credit, which is being rolled out across the country. |
| Who qualifies for Working Tax Credit? | Who qualifies for Working Tax Credit? |
| The idea of this benefit is to encourage people to work. As an example, if you are single, you will need to work at least 16 hours a week, and you can earn a maximum salary of £13,253. Currently claimants earning less than £6,420 receive the full entitlement. As they earn above this level, their payments are reduced. | The idea of this benefit is to encourage people to work. As an example, if you are single, you will need to work at least 16 hours a week, and you can earn a maximum salary of £13,253. Currently claimants earning less than £6,420 receive the full entitlement. As they earn above this level, their payments are reduced. |
| Who qualifies for Child Tax Credit? | Who qualifies for Child Tax Credit? |
| To qualify for CTC you need to have at least one child, but you don't need to work. As an example, those with one child can earn up to £25,000 and still qualify for a payment. For those also claiming WTC, anyone earning less than £6,420 (the income threshold) will receive the full entitlement. For those not claiming WTC, they can earn up to £16,105 before seeing a reduction in their payments | |
| What changes are planned for April 2016? | What changes are planned for April 2016? |
| The income threshold for Working Tax Credits - £6,420 - will be cut to £3,850 a year. In other words, as soon as someone earns £3,850, they will see their payments reduced. The income threshold for those only claiming CTCs will be cut from £16,105 to £12,125. | |
| The rate at which those payments are cut is also going to get faster. Currently, for every £1 claimants earn above the threshold, they lose 41p. This is known as the taper rate. But from April, the taper rate will accelerate to 48p. So for every pound earned above the threshold, claimants will lose 48p. | The rate at which those payments are cut is also going to get faster. Currently, for every £1 claimants earn above the threshold, they lose 41p. This is known as the taper rate. But from April, the taper rate will accelerate to 48p. So for every pound earned above the threshold, claimants will lose 48p. |
| There will be similar reductions for those who claim work allowances under Universal Credit. | There will be similar reductions for those who claim work allowances under Universal Credit. |
| Who will be the losers? | Who will be the losers? |
| The IFS has said that three million families are likely to lose an average of £1,000 a year, as a result of changes to tax credits. | The IFS has said that three million families are likely to lose an average of £1,000 a year, as a result of changes to tax credits. |
| But the government has argued that the introduction of the National Living Wage (NLW) will raise incomes for many people when it is introduced in April 2016. New personal allowance thresholds will also mean many people will pay less income tax. | But the government has argued that the introduction of the National Living Wage (NLW) will raise incomes for many people when it is introduced in April 2016. New personal allowance thresholds will also mean many people will pay less income tax. |
| The Resolution Foundation - which campaigns for low and middle-income families - has analysed all the changes, taking into account the NLW and new income tax thresholds. | The Resolution Foundation - which campaigns for low and middle-income families - has analysed all the changes, taking into account the NLW and new income tax thresholds. |
| It claims that by 2020, a low-earning single parent, with one child, who works 20 hours a week, and who earns £9.35 an hour, will end up £1,000 a year worse off. | It claims that by 2020, a low-earning single parent, with one child, who works 20 hours a week, and who earns £9.35 an hour, will end up £1,000 a year worse off. |
| A low-earning couple with two children, also on £9.35 an hour, will be £850 a year worse off. However, a childless middle-earning couple will be £350 a year better off, as a result of the new personal tax allowance. | A low-earning couple with two children, also on £9.35 an hour, will be £850 a year worse off. However, a childless middle-earning couple will be £350 a year better off, as a result of the new personal tax allowance. |
| Who will be the winners? | Who will be the winners? |
| Chancellor George Osborne says that anyone who is working full-time on the National Living Wage will be better off, after the tax changes are taken into consideration. However most people claiming tax credits are likely to be working part-time. | Chancellor George Osborne says that anyone who is working full-time on the National Living Wage will be better off, after the tax changes are taken into consideration. However most people claiming tax credits are likely to be working part-time. |
| The amount anyone can earn before having to pay income tax - the personal allowance - rises to £11,000 in April 2016, with the aim of reaching £12,500 by 2020. | |
| The Treasury says higher income tax thresholds have saved basic rate taxpayers £825 a year each since 2010, with 3.8 million people taken out of the tax system altogether. | |
| What is happening with other benefits? | What is happening with other benefits? |
| The actual level of tax credits, along with all working-age benefits, will be frozen until April 2020. This is scheduled to save another £4bn. However, with inflation at or close to zero, one can argue that the impact of this will be minimal. | The actual level of tax credits, along with all working-age benefits, will be frozen until April 2020. This is scheduled to save another £4bn. However, with inflation at or close to zero, one can argue that the impact of this will be minimal. |
| Nevertheless, analysis by the IFS suggests that those in work, but receiving low salaries, will be hardest hit by the changes. | Nevertheless, analysis by the IFS suggests that those in work, but receiving low salaries, will be hardest hit by the changes. |
| The calculations were made before taking into consideration the forthcoming NLW, or tax changes. | The calculations were made before taking into consideration the forthcoming NLW, or tax changes. |
| As the chart above shows, those in the second poorest category of workers are likely to lose more than £1,200 a year. By contrast, the richest 10% stand to lose less than £400. Only those in the ninth richest category will gain. | As the chart above shows, those in the second poorest category of workers are likely to lose more than £1,200 a year. By contrast, the richest 10% stand to lose less than £400. Only those in the ninth richest category will gain. |
| In a subsequent analysis, the IFS said the NLW would go 26% of the way to compensating working households for the forthcoming loss of benefits. But it said households with someone in paid work would still end up £550 a year worse off, on average. | In a subsequent analysis, the IFS said the NLW would go 26% of the way to compensating working households for the forthcoming loss of benefits. But it said households with someone in paid work would still end up £550 a year worse off, on average. |
| What are the planned changes from April 2017? | What are the planned changes from April 2017? |
| From April 2017, those starting a family will no longer be eligible for the family element of tax credits - for CTC, that is £545. The equivalent in Universal Credit, known as the first child premium, will also not be available for new claims. In addition, new tax credit claims will be limited to two children. In other words no allowance will be made for a third or fourth child. | From April 2017, those starting a family will no longer be eligible for the family element of tax credits - for CTC, that is £545. The equivalent in Universal Credit, known as the first child premium, will also not be available for new claims. In addition, new tax credit claims will be limited to two children. In other words no allowance will be made for a third or fourth child. |
| The government has insisted that no existing claimants will lose money as a result of this change. | The government has insisted that no existing claimants will lose money as a result of this change. |
| But The Resolution Foundation says a family with three children, making a claim after April 2017, could be £3,450 a year worse off than under the current system. | But The Resolution Foundation says a family with three children, making a claim after April 2017, could be £3,450 a year worse off than under the current system. |