Poorer families face £3,000 tax bombshell

According to the Resolution Foundation, the impact will be greater on lower-income households

Families with children will be an average of £511 a year worse off from tomorrow despite the Government's trumpeted rise in personal tax allowances.

New research by the independent Institute for Fiscal Studies (IFS) suggests the gain from the Liberal Democrats' flagship policy of raising the amount of tax-free income could be outweighed for almost one million families by cuts to tax credits.

Ministers are braced for a possible backlash among low-income families as the top-ups to their wages from tax credits disappear.

Labour seized on the IFS estimate as a "tax credits bombshell". The Opposition has obtained new Government estimates through parliamentary questions showing that more than 850,000 families will lose all their child tax credit from the start of the new financial year tomorrow.

And up to 212,000 working couples earning less than £17,000 a year will lose all of their working tax credit unless they increase their hours because it will be withdrawn from those working less than 24 hours a week.

The Resolution Foundation think tank branded tomorrow "Black Friday" after finding that thousands of working families will lose up to a quarter of their household income. A young couple working 23 hours a week with one child and a household income of £15,500 currently receive almost £6,000 in tax credits.

Their overall annual income will fall by £2,961 – about 19 per cent – even after the personal tax allowance rise is taken into account. According to the foundation, the impact is even greater for lower- income households because they have more working tax credits to lose.

Gavin Kelly, its chief executive, said: ''Those working under 24 hours a week face the most brutal cuts... if they cannot find extra hours – a real problem given rising under-employment. These huge losses in income will push some families back on to benefits."

Ed Balls, shadow Chancellor, said the gain in real terms from the income tax allowance rise – £42 a year or 81p a week – was outweighed by the child benefit freeze alone, which cost a family with one child £59.80 a year.

Labour leader Ed Miliband said the Government had given up the right to talk about "us all being in it together" as a result of the Budget. "Whatever twists or turns or justifications you offer you can't lower taxes for millionaires while raising taxes for millions of other people and say, by the way, we're all in this together," he told The Independent. "The Government was right to talk about it but the trouble is they've completely failed as a result of their deeds," he said.

Chloe Smith, the Treasury Economic Secretary, said: "The Government's actions mean that from the beginning of the new tax year, 24 million households will be £6.50 a week better off. We're taking millions out of tax altogether by raising the personal allowance, which will put up to £126 cash back in people's pockets. The need to tackle the huge deficit means we have had to take tough decisions, such as on tax credits. But we've taken those decisions in the fairest way possible, meaning more than 15 times as many people gain rather than lose from this week's changes."

A spokesman for Nick Clegg said that when the Coalition's £10,000 goal for the tax-free personal allowance is reached, low and middle earners would be £700 a year better off.

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