Families face tax-credit crisis again
The Budget contains hidden hardships for poorer families, writes Alison Shepherd
Sunday 27 June 2010
We had been warned it would be painful, and the Chancellor didn't disappoint. Benefits are to be cut and taxes pushed up, but one of the little-explored financial blows may come in the form of tax- credit reform.
The headline changes to the system – a £150 rise in the credit given for each child, and the lowering of the income threshold for receiving credits from £50,000 to £40,000 – have been broadly welcomed by social campaigners, but they warn that other measures will fall disproportionately on poor households.
"Some of the Budget changes will be hard for people to spot and understand," says Katie Lane from Citizens Advice. "Families need to be alert for changes to their income that they had not anticipated."
The changes causing most concern are the "income disregard" amounts. These allow for a household's income to rise or fall without changing their tax-credit entitlement for that year. Tax credits are based on the previous year's earnings and, currently, so long as any rise is not more than £25,000, HMRC will not try to claw back overpayments: the credits are simply adjusted the following year. But George Osborne will reduce this to £10,000 next April and then to £5,000 in April 2013.
A lower threshold can create havoc in the system and in people's lives. When tax credits were introduced in 2003, HMRC could reclaim payments if a household's income rose by more than £2,500 in a given year. The pursuit of £2bn in overpayments, spent by families in good faith, created a public outcry that led to select-committee hearings, an apology from Tony Blair and a rise in the threshold to its current rate.
"There is a danger that we will see a return to the overpayment crises, though maybe not this year," says Robin Williamson of the Low Incomes Tax Reform Group, as the average rise in income for promotion or a new job is around £5,000. " When the threshold was raised, overpayments dropped by a third. It is a worry that we may return to those days."
Mr Osborne's introduction of a disregard for a fall in income has also caused concern.
At the moment any drop in a family's income can immediately trigger a rise in tax credits. But from next April, HMRC will ignore a drop of less than £2,500 within the year.
"If you are low paid, that's a lot of money to have to lose without any redress, particularly in a recession," says Mr Williamson. "This is such a bad decision by the Chancellor. The lack of a fall disregard was one of the things that made tax credits so effective at helping low-income families."
Another "hidden" Budget measure which experts fear will hurt household incomes is the change in the taper, the way credits are withdrawn as income rises, from 39p for every pound earned over the threshold to 41p.
"A couple earning £29,000 with two children will have to earn 15p in the pound more, just to keep the same income level because of the increased rate of taper," says Helen Barnard, of the Joseph Rowntree Foundation. "If you also take into account the announcement to switch the inflation measure used to uprate benefits and credits, it will very quickly erode low incomes."
The decisions that Mr Osborne did not address in his speech, but which appear in the Budget Report, also concern Ms Barnard and were attacked by acting Labour leader Harriet Harman last week.
"The Chancellor failed to say that the threshold for tax credits will fall to £30,000 in 2012 and that payments will start to be reduced for families earning more than £25,000. The more you analyse this Budget the more regressive it becomes," Ms Barnard says.
The "slow-burn" aspect of the tax credit changes, those elements that will be brought in over time, also worry Edward Graham, from the Child Poverty Action Group.
"Mr Osborne said that the Budget will have a neutral effect on child poverty, but at best it will be neutral for only the first two years before we feel the full negative impact of all of his changes, particularly to tax credits," he said. "We are concerned that the poorest people are having to pick up the bill for the mistakes of the banks and governments."
Katie Lane, Citizens Advice
"The introduction of a lower disregard for a fall in income is worrying. The Budget book says the Treasury hopes to save £500m from this disregard, which shows just how many people will lose out, and will struggle to make ends meet."
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Government's Pension Wise guidance service is up and running
Bargain Hunter: BT improves its mobile reception with 'incredibly competitive' deals
Mark Dampier: What price equities when cost cutting does nothing for profits?
Questions of Cash: Why was my case ignored by My Civil Service Pension?
Offset your mortgage and save thousands
- 2 The West has it totally wrong on Lee Kuan Yew
- 3 Watch: Man takes selfie every mile of 2,600 mile hike, creates amazing timelapse video
- 4 #FreeTheNipple: Women in Iceland bare breasts in solidarity with trolled student
- 5 Scientists have discovered a simple way to cook rice that dramatically cuts the calories
Nigel Farage brands LGBT activists 'filth' and 'scum' and accuses them of scaring away his children after they invade his local pub
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
JK Rowling responds to fan tweeting she 'can't see' Dumbledore being gay
Russia threatens Denmark with nuclear weapons if it tries to join Nato defence shield
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Revealed: Putin's army of pro-Kremlin bloggers
iJobs Money & Business
Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...
Negotiable: Recruitment Genius: You will be the first point of contact for all...
£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...
£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...
Day In a Page
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station