House of LordsPolicy in Practice was asked to pull together a briefing note on the changes to tax credits ahead of the showdown today in the House of Lords.

We work with our local authority partners to carry out detailed, household level analysis on the impacts of reforms now, all the way through to 2020. We take into account a sample of over 100,000 working age households, and assess the cumulative impact of tax and benefit reforms on household income.

Our findings were put succinctly by a benefits manager in a Conservative constituency:

‘The government wants people to work, but this goes against that’.

Policy in Practice is working with local authorities to map the impacts of welfare reforms on each low income household.

1. Two-thirds of Working Tax Credit recipients can expect to be worse off in 2020

Based on analysis on over 100,000 households of working-age in receipt of Housing Benefit and Council Tax support, and taking into account the impact of the National Living Wage at £9.00 per hour, and a personal tax allowance of £12,500, we find that 67% of Working Tax Credit recipients will still be worse off in 2020, compared with today.

* Analysis update: We have updated our analysis this morning to take into account the 30 hours of free childcare that will be available to three and four year olds. If we assume that all households with children age three to four will be better off (which may not necessarily be the case) we find that half of all Working Tax Credit recipients within our sample will still be worse off in 2020.

2. Owner-occupiers will be among the hardest hit when the reforms first land in April 2016

Tax credit savings will be partly offset by higher Housing Benefit and Council Tax Support payments. Because tax credits reduce entitlement to other benefits, 57% of tax credit savings will be offset by increased Housing Benefit and Council Tax Support.These savings will not by spread evenly. Many owner-occupiers, who do not receive Housing Benefit, will not have their tax credit cuts mitigated and may find themselves pushed into crisis.

Some in receipt of Housing Benefit and Council Tax Support will see their support increase by up to 85p for each pound lost in tax credits. This support, which offsets the some of the impact of the cuts, will erode over time due to increased earnings under the National Living Wage. Higher earnings cause tax credits, Housing Benefit and Council Tax Support to be withdrawn, often simultaneously.

3. Work incentives will be weakened within tax credits and Universal Credit

A higher withdrawal rate will make it harder for people that try to earn their way back to their original standard of living. Working Tax Credit recipients that choose to counter the loss by increasing their earnings will lose up to an additional 7p for each pound earned. Effective tax rates may increase up to 93p in the pound.

4. Higher effective taxes make it harder to respond by increasing earnings, while people on low or no earnings will not be affected

To qualify for Working Tax Credit, households have to work a certain number of hours to be considered in remunerative work: 16 hours per week for lone parents and disabled people, 24 hours for couples with children and 30 hours for people without children. The option to increase their working hours may be limited, and will be penalised by a higher withdrawal rate of tax credits.
Tax credit recipients who are not in work and the lowest earners, including self-employed households (some of whom are thought to under-report their earnings) will not be impacted by these changes. Those that contribute most to the economy will be hardest hit.

5. The government was elected to reform the welfare system to make work pay

Low effective tax rates within tax credits and Universal Credit reward enterprise and endeavor, help lower earners, and aid progression in work. They ensure that more of the benefits of a National Living Wage and a lower tax threshold reach lower earners. Protecting the lower withdrawal rate within tax credits would send the message that this government is the party not only of low taxes, but of low effective taxes.

Identify which households will be impacted in advance

We find that frontline advisors within local organisations want to work with the government to support people toward greater independence, and to deliver on the policy intent. However, too often they don’t feel they have enough information to properly advise their customers.

To avoid leaving advisors on the back foot, local authorities including Birmingham, Newcastle, North Hertfordshire and Hounslow, are working with Policy in Practice to map the impact of welfare reforms on each individual household on a low income within their local authority.

To understand more about how we can help the residents in your local authority, contact us.

3 Comments. Leave new

  • Excellent, thanks for responding!

    Hansen

    Reply
  • “Effective tax rates may increase up to 93p in the pound.”

    Given the amount of attention you’re about to get for your analysis, you seriously need to show your workings for how you got to this figure. If the right wing media made a statement as bold as that without attaching evidence to support it, we’d all be going nuts over it.

    Link to the study please.

    Reply
    • Dear Hansen,

      You may be interested to read my blog post explaining effective tax rates. It shows how the withdrawal of Housing Benefit, tax credits, income tax and national insurance together can create an effective tax rate of 91% today, and how increasing the tax credit withdrawal rate to 48% will result in an effective tax rate of 93%.

      Kind regards,
      Lisa

      Reply

Leave a Reply

Your email address will not be published.

Fill out this field
Fill out this field
Please enter a valid email address.

Register for an upcoming webinar

TitleDateStart TimeDurationRegister
How the housing crisis has deepened the cost of living crisis For most people housing is the highest living cost, yet the ongoing housing crisis in the UK is often overlooked when discussing the current cost of living crisis.

This webinar will explore the policy issues affecting housing affordability for low-income households, examining the scale of the problem as well as what can be done in both the short and long term.

We will highlight important work done by our clients using data to proactively address housing issues.

We will be joined by a leading local authority to discuss a recent project conducted with Policy in Practice that used benefits administration data to identify households in temporary accommodation that could be helped to move into the private rental sector.

Join this webinar to learn:

- How UK housing policy interacts with the cost of living crisis
- How local authorities are using data to proactively tackle housing affordability problems
- Actions you can take now to support your residents dealing with housing issues alongside the cost of living crisis
27/7/202210:30 BST1.3 hours
Register
How to identify and support Just About Managing households using data The government has said it wants to make life easier for the 'squeezed middle' or people who are just about managing. These are the families who are not rich and they are also not those on the lowest incomes. Despite most being in work, they are struggling to meet their cost of living and it is no wonder.

The cost of living hit a 30-year high in February with inflation running at 6.2% and outpacing wage growth. Electricity bills were up nearly 20% in the year to January 2022, and gas bills by 28%, with further rises expected. Private rental prices across the UK went up by 2% in the year to January, the highest rate for five years; in the East Midlands that figure was 3.6%.

We know that one in five UK adults (10.3 million people) have less than £100 in savings, one in ten have no savings at all and more than a quarter have less than £500. Many are one broken appliance away from slipping into debt.

Local authorities want to help families who are struggling now to avoid a crisis down the line yet they have little or no visibility over people who are not already claiming benefits. Now though, analysis of other datasets can be used to get a clearer picture of families who are just about managing.

Join this webinar to learn:

- Who is just about managing now but at risk in the future due to the rising cost of living
- Which datasets can be used to identify families in danger of debt
- How local authorities can target support to avert crisis
21/9/202210:30 BST1.3 hours
Register
Menu
Skip to content
%d bloggers like this: