Tax credits: win some, lose some more

Issue 221 (April 2011)

Mark Willis looks at the impact of the new rules affecting tax credits which came into force on 6 April 2011.

Introduction

The Government announced a series of changes to tax credits in last year’s Emergency Budget and Spending Review. The Chancellor told Parliament that low income families would be protected from the adverse effects of the cuts, and that taken together, the policies would have no measurable impact on child poverty over the next two years.1

Higher family element abolished

There is now only one rate of the family element of CTC, which is £545 a year. There is no longer a higher rate for a family with a baby under the age of one, which previously amounted to £1090 for one year (sometimes known as baby element or baby addition). For claimants with a baby born between 6 April 2010 and 5 April 2011, the higher rate ends on 6 April 2011, so they will lose the additional £10.50 a week which, prior to the change in the rules, would have continued until the baby’s first birthday.

Example

Nicole is a lone parent on income support, with one baby aged 3 months. Her weekly entitlement to CTC before 6 April 2011 was £65.10. From 6 April 2011, her weekly entitlement is £59.36. Her income support has gone up by £2.05 and her child benefit is frozen.

Rates and thresholds

The rate at which tax credits are withdrawn due to income is increased from 39% to 41% from 6 April 2011. This 41% rate also applies to the family element when income reaches £40,000 (previously the family element was reduced at a rate of 6.67% of income over £50,000).

The threshold for CTC only is reduced from £16,190 to £15,860. This was not announced in the Budget or Spending review but is a consequence of the increased withdrawal rate and the freezing of the threshold for working tax credit (WTC) at £6,420. It ensures that non-working families would not continue to receive CTC in full on an income level at which working families would start to lose CTC. To reduce the impact of these and other changes, the rate of the child element has increased by £180 above inflation, rising from £2,300 in 2010/11 to £2,555 in 2011/12. The basic and 30 hour elements of WTC are frozen for three years

Income disregard reduced

For 2011/12 awards, the disregard applied to an increase in income has been reduced from £25,000 to £10,000. The old £25,000 disregard was introduced in 2006 with the aim of reducing overpayments, with some success, as it meant that a rise in income was less likely to affect tax credits during the year. The reduction to £10,000 is more likely to affect people, for example if returning to work after maternity or sickness leave, so may lead to a rise in overpayments. If claimants do not notify the Revenue of the expected higher income, it is very likely that they will be overpaid and be asked to repay at the end of the year. The old disregard of £25,000 will still apply to final decisions made on 2010/11 awards, when income is compared with 2009/10.

Example

Danni is a lone parent and had her first baby in July 2010. She received maximum CTC & WTC while she was on maternity leave, earning £6,000 in 2010/11. Her tax credits worked out as £153.51 a week prior to 6 April 2011.

In April 2011, she goes back at work on a salary of £21,000. As the new disregard of £10,000 is in force, her CTC and WTC award for 2011/12 should be based on current year income after disregard, which works out as £11,000.

Her weekly tax credits are reduced to £113.12, losing around £35 a week because of the change to the income disregard, as well as losing the £10.50 baby element earlier than expected. If she does not provide an accurate estimate of income when she starts work, she will be overpaid.

Childcare element

The percentage of childcare costs covered by WTC has been reduced from 80% to 70% from 6 April 2011. Childcare costs are subject to a maximum of £175 a week for one child and £300 a week for two or more children, so the most a claimant can now receive is £122.50 for one child or £210 for two or more children. For claimants who were already getting the childcare element in 2010/11, there is no protection from the new rule, so many will experience a reduction in payments.

Example

Mike is a lone parent with two children. He works full-time on the minimum wage, earning £207.55 a week (gross), and has childcare costs of £300 a week. His total tax credit payments in 2010/11 worked out as around £397.15 a week. From 6 April 2011, his payments will go down to £374.47.

People aged 60 and over

People aged 60 or over who are working at least 16 hours a week qualify for WTC from 6 April 2011. This is a new qualifying route, and is separate from the 50 plus qualifying route (which remains for now but is to be abolished from 6 April 2012). There are no additional rules about when the claimant started work or what they were doing before starting work, and no limit to how long WTC is payable under this qualifying route. There are no extra elements payable for people over 60, so most people would receive the basic element of up to £36.75 a week as a single person or up to £74.06 as a couple (even if only one is working 16 hours). Note that the age to qualify for WTC is the 60th birthday, not the qualifying age for pension credit some time later (about 60 and a half from April 2011). People who receive pension credit are automatically entitled to maximum tax credits, but WTC is counted as income for pension credit. At first glance this new rule may seem like a simple win: win situation for older people, but it could cause problems in some cases – see example below.

Example

Mr & Mrs Brown are a couple, both aged 61. Mrs Brown’s income is retirement pension of £102.15. Mr Brown works 16 hours, earning £135 a week (£10 disregard for PC). They qualify for support for mortgage interest of £60.00 a week. They get pension credit (PC) guarantee, which works out as £42.55 a week from April 2011.

They claim working tax credit from 6 April 2011 and tick the box which asks if they receive pension credit. This leads to an award of maximum tax credits at £74.06 a week.

When they notify the Pensions Service that they are getting WTC of £74.06 a week, their PC stops and they are told they have been overpaid for the period they were getting WTC.

When they notify the Tax Credits Office that PC has been stopped from the date WTC started, their WTC is reduced to £32.06 a week and they are told they have been overpaid for the period they were not getting PC.

Now that their WTC has reduced to £32.06, they are eligible for PC again and start to receive £10.49 a week. They notify the Tax Credits Office that they are getting pension credit again, and their WTC is increased to the maximum, £74.06 a week. When they notify the Pensions Service that they are getting WTC of £74.06 a week again, their PC stops again….

Households on more than £40,000

From 6 April 2011, the second income threshold, above which the family element of CTC starts to be withdrawn, is reduced from £50,000 to £40,000. However, contrary to statements in the media and even on the government’s own website, this does not mean there will be no tax credits for families on more than £40,000 a year.2 Families who were getting the family element only will still be entitled to a reduced amount on an income of up to around £41,265. However, in some cases there may still be entitlement to a significant amount of tax credits if income is substantially over this level. This is likely to apply to claimants with a large family, disabilities or childcare costs – see example.

Example

Jack and Diane both work full-time on £24,000 salaries. They have three children, one of whom is severely disabled, and they claim maximum childcare costs. They will still be entitled to around £10,682.58 tax credits payable in 2011/12. Due to the changes in the childcare element and withdrawal rate, this is down by around £1,500 on 2010/11.

The Revenue is writing to families on more than £40,000 whose child tax credit is reduced to nil from 6 April 2011, giving notice that the claim will be withdrawn. However, claimants can still renew their claim if they contact the Tax Credits Helpline within 30 days to request that it continues. It is advisable to renew a claim if there is a possibility that income in 2011/12 will go down. This may lead to an initial ‘nil award’ decision for 2011/12, but this can be revised later to make payments for the whole tax year. Waiting until circumstances change before making a new claim can mean losing out on a substantial amount.

Conclusion

The extra £3.45 a week above inflation in the child element will not go very far for some families, especially those with a new baby, high childcare costs or a fluctuating income. The protection for ‘low income families’ is also limited as the cuts will be felt well below the average earnings level of around £24,000. Families on above average incomes with disabled children, high childcare costs and mortgage or rent to pay will certainly not feel that they have the broadest shoulders to bear the brunt of these cuts. Future changes which have been announced for April 2012 and 2013 are aimed at making further savings and will make things harder for many families, increasing complexity of the tax credits system and reducing the incentive to work. Although the government has made assurances that no one will be worse off when the universal credit is introduced in October 2013, this is only after the combined impact of £18 billion in tax credit and benefit cuts. Closer inspection has shown that the overall changes, far from having no impact in child poverty, will leave thousands more families in poverty.3

 


Please be aware that welfare rights law and guidance change frequently. Therefore older Bulletin articles may be out of date. Use keywords or the search function to find more recent material on this topic.