Five reasons the Lords should vote to block tax credit proposals today

Policy 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.