Cable is wrong: Working families will be worse off after tax credit changes

While recent announcements have led to increases in the child element, they have also led to significant cuts in the basic element, 30 hour element and childcare elements as well increasing the rate at which tax credit awards fall in relation to rising household incomes. In contrast to the business secretary’s claim, the reality for many working families (particularly those with childcare costs) is therefore that the total impact of these changes means they will receive far less now than they would do if current policy remained in place.

This morning, on the Today programme, business secretary Vince Cable claimed the coalition was increasing tax credits for working families. It is correct that as a result of measures in the budget and spending review the child element of child tax credit – which is available to families in and out of paid employment – is being increased by £180 in 2011/12 and by £110 in 2012/13.

Were the element only to be increased in line with RPI inflation (based on inflation as of September of this year and as per the OBR’s forecast for next year) it would be worth £120 less by 2012/13 than it will be under the Coalition’s plans. The newly announced increases are therefore a positive development and are to be welcomed.

But Tax Credits are complicated as the actual amount that each family gets depends both on their specific household income and on the different elements that their award is made up of. A working family (with a low enough income) will receive child tax credit (which is made up of a family element, a child element and additional premiums for disabled and severely disabled children) and also various elements of working tax credit (including the basic element, the couple or lone parent element and, if a member of the household is working more than 30 hours, the 30 hour element).

If the household has eligible childcare costs, they can also receive considerable help with this expenditure through a childcare element. This maximum total award is then tapered off at a rate of 39p in the pound as their household income rises above £6,420. This means that for every £1,000 a household’s income rises above £6,420, £390 of their maximum tax credit award is lost.

While recent announcements have led to increases in the child element, they have also led to significant cuts in the basic element, 30 hour element and childcare elements as well increasing the rate at which tax credit awards fall in relation to rising household incomes. In contrast to the business secretary’s claim, the reality for many working families (particularly those with childcare costs) is therefore that the total impact of these changes means they will receive far less now than they would do if current policy remained in place.

The easiest way to show this is to consider a sample family. The following analysis considers a couple household with two children, where one adult works full time (35 hours) and the other part time (16 hours), both at minimum wage. Both their children spend 14 hours a week in childcare, at a total cost of around £106 a week to the household.

A number of changes announced in the budget and spending review will reduce the entitlement this family has. These include the move to uprate tax credit elements by CPI rather than RPI, to freeze some elements, to increase the overall withdrawal rate and to reduce the amount of childcare costs that can be reimbursed. As a result a family with two children and one full time and one part time worker each on minimum wage are £729 a year worse off by 2012/13.

The following table shows these changes, and contrasts them with what this family’s entitlement would be if current policy were to remain in place:


Child tax credit

Elements (annual)

Policy change

Elements (annual) 2012/13 changed policy

Change in entitlement (from current rules)

Family element

£545 (assume frozen as was the case between April 2009 and April 2010)

No change

£545

= no change
Child element (per child) £2,471 per child = £4,942 (assume uprating by RPI) Above inflation rises announced in Budget and CSR £2,590 per child = £5,180 = £238 increase
         
Working tax credit        
         
Childcare 80% of eligible costs (with total eligible costs capped at £300) = £4,410 Proportion of eligible costs met by tax credits will fall from 80% to 70% 70% of £106 per week = £3,858 = £552 loss
Basic element £2,063 (assume uprating by RPI) Frozen for 3 years rather than increased by RPI £1,920 = £143 loss
Couple element £2,030 (assume uprating by RPI) Element will be increased by CPI rather than RPI £1,995 = £35 loss
30-hour element £849 (assume uprating by RPI) Frozen for 3 years £790 = £59 loss
Total maximum award £14,839   £14,288  

Tapered final award:

Total award after taper = £11,344

Rate at which award is withdrawn changes from 39 per cent to 41 per cent

Total award after taper = £10,614

= £729 loss (as a result of lower maximum award and increased taper rate)

Even if you add in the amount the family will gain as a result of the change in the income tax threshold, they remain significantly worse off. And if you add in other losses the family could incur as a result of changes including the freeze in child benefit levels, the abolition of Educational Maintenance Allowance and the reversal of the previous government’s policy to introduce a £4 a week toddler tax credit, their losses rise further still.

In addition, if the family had a new baby they would feel the loss of the Health in Pregnancy Grant (£190) as well as the complete abolition of the tax credit baby element (which is currently worth £545 on their maximum award).

The family could also be hit by the proposals in the budget which reduce the backdating period for tax credit awards to one month (it is currently three months). If they don’t get their claim in on time, they could lose several months of their entitlement. And if the full time worker in the household were to lose their job, the family could find they lose all of their working tax credit entitlement (as a result of the government’s plan to increase the hours threshold for working tax credit entitlement for couples from 16 working hours to 24 hours a week).

They also face new penalties if both remain in work but on reduced hours, as new rules announced in the budget mean that families experiencing a fall in income will have the first £2,500 of their new income disregarded when their in-year entitlement is re-calculated, meaning that until the new financial year they will end up with the same entitlement as a family in the same circumstances earning £2,500 more.

This sample family is far from unique. Families on minimum wage as well as median incomes are losers from these tax credit changes – it is simply inaccurate to claim otherwise.

24 Responses to “Cable is wrong: Working families will be worse off after tax credit changes”

  1. Artisan Cupcake Co.

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  2. Martin Johnston

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  3. Humphrey Cushion

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  4. Shamik Das

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  5. GORDON LYEW

    RT @humphreycushion: RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  6. Angela Pateman

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes http://bit.ly/c5aCkI

  7. jennifer roberts

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  8. Hali Santamas

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  9. Low-income working families will be worse off under Coalition Tax Credit changes | ToUChstone blog: A public policy blog from the TUC

    […] have a post up at Left Foot Forward setting out my analysis of the impact that the Coaltion’s Tax Credit policy will have for […]

  10. Shlomo Pines

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  11. Redstar PCS Stoke

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  12. Mary Goudie

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  13. Lynne Lake

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes: http://bit.ly/bWWoTI

  14. Mr. Sensible

    And tax credits are meant to help people get back to work…

  15. Robster

    RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes http://bit.ly/c5aCkI

  16. Katy

    Very useful article.
    Many of the poorest families will also be losing out on 500 pounds due to the changes to the SureStart Maternity Grant which is now only available to first born children – regardless of how long ago you had your last baby. There are so many valid reasons you may no longer have your first born’s baby equipment. And lots of baby things are not supposed to be reused – such as mattresses.
    I am on income support, and were I to have a child now, I would lose out on:
    500 pounds surestart grant, 190 pounds health in pregnancy grant, the baby element of tax credit (worth an extra 10 pounds a week – around 545 pounds a year), 500 pounds child trust fund
    As it is, my access to SureStart (which I rely on, and has been an absolute godsend) has already been withdrawn due to lack of funding. I will also be losing 50 pounds a week from my Incapacity benefit (down from 100 pounds a week) and will be losing 10% of my council tax benefit. My child benefit has been frozen, and the annual increase to my benefit will be worth even less.
    When I start work again, I will also lose out on valuable child care support.
    How can they say the poorest are being ‘protected’?

  17. Maizey R.

    RT @creativegeek: RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes http://bit.ly/c5aCkI

  18. yorkierosie

    RT @creativegeek: RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes http://bit.ly/c5aCkI

  19. Plymouth City UNISON

    TAX CREDIT CUTS OVER TIME: Hint – go straight to table: http://bit.ly/bEiIzi #cuts #swcuts #frontline

  20. mike

    Without sounding like UKIP or worse
    how would Cable stop people on low pensions moving from Europe to the UK to claim his universal pension ???

  21. Rachael

    RT @creativegeek: RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes http://bit.ly/c5aCkI

  22. Barbara Weekes

    RT @creativegeek: RT @leftfootfwd: Cable is wrong: Working families will be worse off after tax credit changes http://bit.ly/c5aCkI

  23. Simplification, sanctions and cuts won't create jobs | Left Foot Forward

    […] Tax Credits are being integrated into this system. Fiendishly complicated, the impacts of the coaltion’s Tax Credit cuts have arguably not yet been fully understood – although new analysis is coming out all the […]

  24. CPAG: Osborne's £3bn tax credit cuts "may have deepened the recession" | Left Foot Forward

    […] Foot Forward has long reported on the false economy of the coalition’s cuts to tax […]

Leave a Reply