Tax credits: What they are and how the cuts could affect you

John Rentoul explains what you need to know about George Osborne's planned cuts to tax credits

The cuts to Tax Credits start in April 2016, and families should receive letters detailing their changes just before or just after Christmas (PA)

Tax credits are cash payments to top up the incomes of low-paid workers, with additional payments for those who have children. They are intended to give people more incentive to work and to fight child poverty and they cost £30bn a year – about the same as the whole defence budget. So, they were an obvious target in Chancellor George Osborne’s search for the £12bn a year in “welfare” savings promised in the Conservative manifesto.

The credits are claimed by 3.3 million families that include someone in work, of which 2.7 million include children. The average loss for households hit by the changes announced in July is £1,300 a year, according to the House of Commons Library. The cuts start in April 2016, and families should receive letters detailing their changes just before or just after Christmas.

On average, about a quarter of credits lost will be made up by gains from the National Living Wage (NLW), according to the Institute for Fiscal Studies. The NLW also comes in in April, raising the minimum wage from £6.70 an hour to £7.20 for workers over 25.

Tax credits are complex and it is hard to generalise about the changes. So, here we look at how some notional families might be hit.