In July’s Summer Budget, George Osborne announced two big cuts to work incentives in tax credits and the impacts of these changes are being discussed at the Conservative Party Conference this week.

The first cut to tax credits involves the taper rate which will increase from 41% to 48%. This means that tax credits are withdrawn more quickly when you earn more. The Treasury estimates that this measure will save £3.7 billion over the next five years.

The second involves the amount people in receipt of tax credits can earn before this withdrawal kicks in. This amount will fall from £6,420 to £3,850 per year for those receiving Working Tax Credit and from £16,105 to £12,125 per year for people only receiving Child Tax Credit. This measure, combined with reductions to the Universal Credit work allowances, is expected to save an additional £15.9 billion over the next five years.

These large savings for the Treasury will mean a substantial reduction in tax credits for households on low incomes. But the Government have argued that increases in the personal tax allowance and the National Living Wage, also announced in the Summer Budget, will compensate for the cuts, leaving households better off.

Yet, as Policy in Practice argued just after the Budget, the withdrawal of benefits and tax credits means that these policies will not benefit many low income families who will, in fact, see their incomes fall.

Why a Living Wage won’t compensate for tax credit cuts

Welfare is a complex system of work allowances and taper rates. When your earnings increase, your entitlement to benefits and tax credits decreases. This means that when people receiving benefits or tax credits get a pay rise, they don’t get to keep all of it – and sometimes they don’t get to keep any of it at all.

Let’s take the example of Sue who is a lone parent with one child who works full-time at the National Minimum Wage. In 2015, she has a weekly take home income of £381.25 per week.

Summer Budget - worse off in 2016

In 2016, Sue will be worse off by £8.59 per week – around £447 per year. Her gross earnings will rise by £24.50 per week due to a higher wage and a higher personal tax allowance. But her Working Tax Credit will be reduced by much more, – £42.72 per week, due to this higher wage and the cuts to tax credits. Her Housing Benefit increases as a result of her lower tax credits (the benefit system is complicated), but not by enough.

What Sue gains from the Living Wage and a higher personal tax allowance does not compensate for what she’s lost in tax credits.

Analysing tax credit cuts on a local level

Policy in Practice has been working with local authorities to help them estimate and plan for upcoming changes to benefit and tax credits.

Analysing a cohort of low income households in receipt of Housing Benefit in one local authority, we found that all families in receipt of Working Tax Credit will have their tax credits reduced as a result of the higher withdrawal rate and lower income threshold. 33% will lose their entitlement to Working Tax Credit entirely.

On average, households receiving Working Tax Credit will lose an average of £44 per week – around £2,267 over the course of the year. By 2020, these same households will only see their earnings rise by an average of £36 per week as a result of a £9 National Living Wage and a personal tax allowance of £12,500.

Our analysis finds that the majority of families receiving Working Tax Credit (66%) will not see their earnings rise enough to compensate for the loss of tax credit income. Young parents under 25 in particular will lose out – 95% will be worse off – because they will not qualify for the National Living Wage.

Only 34% of people receiving Working Tax Credit will be better off. These households are more likely to be single people without children and owner-occupiers.

Other independent analysis has had similar findings. The IFS finds that only 13% of income losses due to benefit and tax credit changes will be offset by the National Living Wage. The Resolution Foundation argues that three million of the poorest working families will lose £1,350 each year.

The cumulative impact of the Summer Budget

Changes to tax credits are not the only welfare reforms coming to force in April 2016. Among other changes, the benefit cap will fall from £26,000 per year to £20,000 outside of London and £23,000 inside London.

Typically, the impact of each policy is analysed in aggregate, and in isolation. But because of the way policies interact, and have knock on effects, it is important to model these changes together.

Policy in Practice’s household-level analysis for local authorities can do just this. In one local authority, we found that the cumulative impact of the Summer Budget doubled the income reductions for low income households due to welfare reform, compared to what they had been to date.

On average, households have seen their incomes fall by £9.73 per week due to welfare reforms that have already been implemented (e.g. the under-occupation charge, benefit cap, etc.). This will rise to £18.44 per week as a result of the Summer Budget.

, , , , ,

1 Comment. Leave new

  • I have not seen it mentioned in the press, but in September 2015 I lost my job and claimed Universal Credit. I got another job by Oct 12th and was told my Universal Credit would run in the background in case the job fell through. I was told I could not claim Working Tax Credit as I was counted as in receipt of UC although I no loner got money from them. I have now been told that this back up period ends after 6 months(March 2016) but I cannot claim Working Tax Credit because I have been on UC! This also affects my eligibility for free health care.

    This seems are rather underhand way of pushing people off Working Tax Credit. I certainly can’t afford to see a Dentist or Optician!


Leave a Reply

Your email address will not be published. Required fields are marked *

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

Register for an upcoming webinar

TitleDateStart TimeDurationRegister
Reducing barriers to work using data led campaigns In September 2023 the UK experienced an economic inactivity rate of 21.3% and an estimated unemployment rate of 4.3%, both of which have increased compared to previous data. Economic inactivity has surpassed pre-pandemic levels, prompting government efforts to integrate this group into the workforce.

Historically, policies under Universal Credit and legacy benefits emphasised pushing people into employment through conditionality and short term measures. Today, both major political parties are exploring ways to facilitate return to work and eliminate barriers to employment. However, the government is also extending conditionality and adopting a tougher stance on sanctions for a broader range of people.

Haringey is home to a young, ethnically diverse population. In June 2023, almost one fifth of those between 16 to 65 were on Universal Credit. Nearly 7% of residents over 16 were claiming unemployment related benefits, a figure above the London average of 4.7% and the 3rd highest rate of all UK councils

Haringey Council wanted to find ways to overcome barriers to employment for young people and families with children and has used data to achieve success with its employment support programmes.

Join this webinar to learn:

- The new carrot and stick policy changes designed to break down barriers to work and reduce economic inactivity
- What Haringey Council did to increase take up of free childcare for two year olds to 70%
- How Haringey Council successfully helped 95 NEETs on their employment journey

With guest speakers from Haringey Council
29/11/202310:30 GMT1.3 hours
Policy review of 2023 and what 2024 may hold Join our last webinar of 2023 to hear our policy analysts review 2023's policy changes and big issues, from the ongoing cost of living and energy crises to the funding of local government and the Autumn Statement.

We will highlight our policy findings from the year including our work that revealed that millions of households across the UK are missing out on £19 billion of support each year.

We'll look at the role that data is playing in helping leading organisations to tackle these issues.

Through case studies of different types of households we'll look at what the changes mean for families now, and what 2024 has in store.

Along the way we'll share the positive impact that organisations we work with ​are having, and give practical solutions that others can adopt.
6/12/202310:30 GMT1.3 hours
How the debt sector is connecting people to support31/1/202410:30 GMT1.3 hours
Skip to content
%d bloggers like this: