Tax credit cuts will hit family finances

The new rules on working tax credits from the start of the 2012/13 tax year will hit around 212,000 low income families, according to information published by the House of Commons Library. This will reduce their income on average by £2,600 each year.

Up till now, most couples with children have qualified for working tax credit, provided one partner works at least 16 hours each week. But from April 2012 couples will need to work 24 hours between them, with one partner working at least 16.

The 2012 Budget statement said the measure would cut public spending by around £550 million. The House of Commons Library paper, following a question by Cathy Jamieson, a Labour MP, indicates that (as of December 2011) there were 212,000 couples with children on working tax credit and working 16–24 hours. Dividing the budget savings by the number of couples gives an average loss of just under £2,600 per year.

The Coalition government has not provided any transitional arrangements – those affected lost all working tax credit immediately. This is despite the fact that from October 2013 the new universal credit will mean another set of rules that may largely restore families to their previous situation.

Anushree Parekh at the New Policy Institute estimates that for a couple with one child and one partner working 16 hours at the national minimum wage, their net income would be cut by nearly 30 per cent. Before the changes, their income would have been £252 per week – £97 earnings, £20 child benefit, £60 child tax credit and £74 working tax credit. From April 2012 they will lose all working tax credit, resulting in a drop to £178 per week. Parekh also illustrates the perverse effect on work incentives. If both partners stopped working, their net weekly income would be £190, more than their income of £178 under the new rules. For further details see the New Policy Institute website.

In addition, an analysis by the Guardian of 112,000 Jobcentre Plus vacancies shows that only 52 per cent guaranteed enough hours to meet the new rules. In theory, if one partner could find 8 extra hours of work the family would be better off overall, but many fear being caught in the working-hours trap.

See also:

On the Guardian website:

Working Tax Credit Changes are Ticking Time-bomb, say Campaigners (30 March 2012)

Tax Credit Changes Mean Bleak Friday for Thousands of Poor Families (5 April 2012)

On HM Revenue and Customs website:

An HMRC leaflet describing the new rules on working tax credit and child tax credit

On the Parliament website:

A House of Commons Library briefing on working tax credit (Steven Kennedy, Changes to the Working Tax Credit Hours Rules for Couples with Children from April 2012, Standard Note SN06267)

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