Tax Credit changes from April 2016

Summer Budget 2015 announced a package of welfare measures expected to yield savings of £13 billion a year by 2020-21. Changes to tax credits and to Universal Credit (UC) (which is replacing tax credits and means-tested social security benefits) taken together are expected to save £4.6 billion in 2016-17, rising to £5.8 billion a year by 2020-21.

The Welfare Reform and Work Bill introduced following the Budget provides for the child element in tax credits and in UC to be limited to two children for new claims and births after April 2017, and abolishes the family elements in tax credits and UC for new claims from 2017.

The draft Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2015, published on 7 September, introduce two other important elements in the Budget tax credits package: the increase in the taper rate from 41% to 48%, and reductions in the income thresholds. These changes take effect from April 2016, and will deliver savings of around £4.4 billion in 2016-17. There is no transitional protection for existing families on tax credits.

The Social Security Advisory Committee (SSAC) expressed concern at the lack of available evidence to support the policy changes, and urged the Treasury to make available more detailed information on the changes and their potential impacts, to ensure effective Parliamentary scrutiny. The Government said initially that it would not be publishing an Impact Assessment for the regulations, but in response to a request from the Lords Secondary Legislation Scrutiny Committee released a document which gives some further information.

These changes from April 2016 will affect almost all in-work recipients of tax credits. At April 2015, 3.3 million in-work families received tax credits, of whom 2.7 million had children. The average impact across all affected families can be roughly estimated as a reduction in the tax credit award of around £1,300 in 2016-17. The actual impact will vary from family to family however; some will lose more than this amount, others less. Some families will lose entitlement to tax credits completely.

The Government has drawn attention to the overall impact on families of the measures announced in the Summer Budget including the new National Living Wage (NLW), the ambition to increase the income tax Personal Allowance to £12,500 by 2020, and free childcare for 3-4 year olds. It states that a “typical” working family – and the vast majority of working households – will be better off as result of the wider package of measures. Analysis by the Institute for Fiscal Studies (IFS) suggests however that among the 8.4 million working households currently eligible for benefits or tax credits, the biggest element of the Government’s wider package – the National Living Wage – would on average only compensate for 26% of the losses due to cuts to benefits and tax credits.

In response to a request from the Chair of the Work and Pensions Committee, Frank Field, the Government brought forward the Commons vote on the regulations introducing the tax credit changes. The debate was held on the floor of the House on 15 September, and the motion to approve the regulations was agreed by 325 votes to 290. Mr Field subsequently wrote to the Chancellor asking him to consider alternative proposals to mitigate the tax credit cuts by maintaining the current threshold and taper for the poorest households.

A date has not yet been announced for the Lords debate on the draft regulations.

This note outlines what tax credits are, the changes announced in the Summer Budget 2015 and how these changes will be implemented. It also looks at the impact these changes will have for families in combination with other measures announced in the Summer Budget 2015, including the introduction of the National Living Wage, the increase to the Personal Allowance and freeze in Child Benefit.

Also attached is an Excel spreadsheet with further analysis of the illustrative impact on households of personal tax, welfare and National Minimum Wage/ National Living Wage changes 2015-16 to 2020-21. This builds on analysis presented in the Summer Budget 2015.