CIOT: Budget response: Low income campaigners respond to tax credit changes
The Low Incomes Tax Reform Group (LITRG) has given a mixed response to the Government’s complicated package of measures designed to reduce spending on tax credits.
One welcome feature are the future increases in the amount payable to a household in respect of each child, £150 above the Consumer Prices Index in April 2011 and £60 above indexation in April 2012. This should go some way to offset the increase in the standard rate of VAT for families with children.
The other tax credit changes are summarised in the notes below.
LITRG’s Technical Director, Robin Williamson, commented:
“The withdrawal of support from wealthier claimants will to some extent shield those on lower incomes from the brunt of the spending cuts. But not entirely.
“The amount by which claimants’ income can increase without it affecting their award is to be reduced from £25,000 to £10,000 from April 2011, which should not make too much difference. But when it decreases to £5,000 from April 2013, we are concerned that, if not carefully managed, it may signal a return of the income-related overpayments that caused considerable distress in the early years of tax credits.
“We are also worried by the proposal to introduce a disregard for reductions in income. This will mean that people on low incomes will not be able to receive extra tax credits until their income has fallen by at least £2,500.”
Background notes explaining the tax credits changes
1. Families with household income above £40,000 will start to have their family element tapered away from 6 April 2011 at a rate of 41%. The family element is currently £545 per year (£1090 if there is a child under one) and is currently only reduced once income reaches £50,000 (sometimes this income figure can be higher if other elements have not been reduced fully). The current reduction is £1 for every £15 of income over the £50,000 threshold. From April 2011, the family element will be reduced by 41p for every £1 of income above the new £40,000 threshold, though this threshold may be higher for families with high childcare costs where the other child tax credit elements have not all been reduced by the time income reaches £40,000.
2. From 6th April 2011, the withdrawal rate will increase from 39% to 41%. Households have their tax credits withdrawn when their income exceeds the ‘first income threshold’ which is £6420 for those in receipt of WTC and CTC, and £16190 for those in receipt of CTC only. The change means that households will lose 41p for every £1 of income above the relevant threshold (currently 39p is lost).
3. From 6th April 2012 the family element will start to be withdrawn immediately after the child element. Currently, the family element (and baby element) is protected from withdrawal until income reaches £50,000 (due to change to £40,000 as point 1 above). This is the case even if all other elements of tax credits are withdrawn much further down the income scale. This change means that some families, particularly those with only one child and no childcare costs, may not receive any tax credits even if their income is much lower than £40,000 whereas currently they would be guaranteed a minimum of £545.
4. Certain elements of tax credits will be removed, including the baby element (from 6th April 2011) and the age 50+ element (from 6th April 2012). Currently families who have a child under 1 get an additional £545 added to the basic family element. This extra amount will be removed from 6th April 2011.
The 50+ element is a work incentive which means that people aged 50 or more can qualify for WTC by working at least 16 hours for the first year when they return to work after receiving certain benefits. Without the 50+ element, those without children and who don’t qualify for the disability element, will be required to work at least 30 hours to qualify for WTC.
In addition, the previous Government announced that from 6th April 2012, an additional amount of Child Tax Credit would be introduced for those with children under 3. This change will no longer happen.
The previous announcement, that those aged 60 and over would be able to qualify for WTC by working at least 16 hours (rather than 30 as currently required) will still go ahead from April 2011 as originally announced.
5. From April 2012, backdating will be limited to one month. Currently, initial claims for WTC and CTC can be backdated up to 93 days. Changes of circumstances which increase an award can also be backdated up to 3 months. This change means that backdating will reduced to 1 month for both new claims and changes of circumstances, making it even more crucial that people do not delay claiming or reporting changes that increase their awards.
6. From 6th April 2011 the income disregard will reduce from £25,000 to £10,000 for two years and then further reduce to £5,000 from 6th April 2013. Tax credits are initially based on previous year income, although there is facility to have them based on an estimate of current year income if you think it will be lower. After the end of the tax year, HMRC ask claimants to confirm their actual income for the year just ended. Providing income for the year just ended has not risen by £25,000 or more as compared to previous year income, tax credits will be finalised based on previous year income and is therefore fairly generous.
The decrease of the disregard to £10,000 and then £5,000 will mean that claimants will need to ensure that they report changes in income to HMRC as soon as possible. When tax credits began, the disregard was £2500, which led to many overpayments as claimants saw large fluctuations in their income.
7. From 6th April 2012, an income disregard of £2,500 for falls in income will be introduced. HMRC have always had a power to introduce an income disregard for falls in income, but have never used it. Currently, if income falls as compared to the previous year, tax credits are adjusted so that the claimant receives an amount based on their new (lower) income. Claimants do not need to wait until the end of a tax year to report a fall in income, they can currently inform HMRC of an estimated income at any point during the year and tax credits will be revised to be based on this new lower income.
The new disregard means that tax credits will not be adjusted until income falls by more than £2500 as compared to previous tax year income. This will be a particular hardship for families on low incomes.
8. The Consumer Price Index (CPI) will be used to uprate all of those elements of tax credits (previously uprated by RPI) from April 2011. The child element of the Child Tax Credit will increase by £150 above CPI in 2011-12 and £60 above CPI in 2012-13.
Notes to editors
1. The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.
2. The CIOT is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.
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George Crozier
External Relations Manager
D: +44 (0)20 7340 0569
M: +44 (0)7740 477374
The Chartered Institute of Taxation
Registered charity number 1037771
www.tax.org.uk
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