Black Friday as Chancellor wields cuts to tax credits

Thousands of low income working families will lose up to a quarter of their household income from this Friday, the start of the new tax year, as major cuts to tax credits start to bite. In particular, low to middle income couples working less than 24 hours will no longer be eligible for working tax credits and are due to lose thousands of pounds, dwarfing only small gains of a maximum a few hundred pounds from increases to personal tax allowances.

A young couple working 23 hours with one child and with a household income of £15.5k receive nearly £6,000 in tax credits this year – around half from working tax credits and half from child tax credits. Under the new rules, their entitlement to working tax credits is switched off from this Friday, cutting their annual income by £2,961 (or around 19%). Even taking into account the increase in the personal allowance and a small increase in child tax credits the family is still projected to lose 19% of their income overall as these gains are offset by the ongoing wage squeeze and freezes to child benefit.

The impact is even greater the less income the household has, as they have more working tax credits to lose. A single earner on the minimum wage of £6.08 an hour, working 20 hours a week, will lose £3,910 – over a quarter (27%) of their overall income.

Gavin Kelly, chief executive of the Resolution Foundation said: ‘‘Friday’s increase to the personal tax allowance provides a small boost to most people in work but millions of low to middle income families will have their tax credits cut at the same time. Those working under 24 hours a week face the most brutal cuts of thousands of pounds if they cannot find extra hours – a real problem given rising under-employment. These huge losses in income will push some families back onto benefits – and are totally at odds with the message of making work pay’.

NOTES TO EDITORS

In total 2.4bn of new cuts to tax credits are due to kick in from the start of the new tax year – April 6^th 2012. They include the withdrawal of working tax credits from couples working less than 24 hours (set to save £515 million in 12/13), a freeze in the value of working tax credits (set to save £480 million in 12/13) and other changes such as reductions in the amount of extra income that can be earned before tax credits are withdrawn (the income disregard). 70 percent of April’s new cuts to tax credits will fall on households in the bottom half of the income distribution.

The personal allowance increase to £8,105 is also due to kick in from the start of the new tax year – April 6^th 2012, and again rise to £9,205 in April 2013. The average low to middle income household will benefit by £200 by the time both changes have been implemented. In cash terms the increase on average benefits those in the higher income deciles 7, 8 & 9 most and 70% of the overall cost goes to the top half of the income distribution.

Case study family working 23 hours a week on a current household income of £15,461. The family are due to lose income of £2,968 (18.9%) overall in 12/13 – nearly all of which comes from the withdrawal of their working tax credits.