Tax credits


In the summer Budget 2015, chancellor George Osborne announced a series of changes to tax credits:


• a reduction in the income threshold in tax credits, and an increase in the withdrawal rate (“taper”) from April 2016;


• reductions in the “work allowances” for most UC claimants from April 2016;


• limiting the child element of tax credits and UC to two children for new claims and births after April 2017; and


• removing the family element in tax credits (and the corresponding first child premium in UC) for new claims from April 2017.


Following defeat in the House of Lords in October 2015, the Chancellor announced in the autumn statement 2015, that the planned reduction in the tax credits income threshold and increase in the taper rate would be dropped. However, the other changes — reducing work allowances from April 2016; limiting the child element of tax credits and UC to two children for new claims and births after April 2017; and removing the family element in tax credits (and first child premium in UC) for new claims from April 2017 — will go ahead.


Instead of cuts of £3.72 billion in 2016-17, rising to £5.71 billion in 2019-20, the expected cuts as a result of these changes are now expected to be around £0.36 billion in 2016-17 and £4.8 billion in 2019-20. 


In addition, reductions to the amount of income “disregarded” from £5,000 to £2,500 will also hit claimants. Any rise in income of £2,500 or more during the award year will be taken into account when finalising tax credit awards. Before April 2013 only income rises of £10,000 or more were taken into account (see Chapter 4 for further information about tax credits). This measure could cost around 800,000 households up to £300 a year. In other words, Osborne has not abandoned his planned cuts, but repackaged them.